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As filed with the Securities and Exchange Commission on September 28, 2000
Registration No. 333-44214
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Post-Effective Amendment No. 2 to Form S-1)
ESAT, INC.
(Name of registrant as specified in its charter))
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Nevada 7370 95-0344604
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer
Organization or Incorporation) Classification Code Number) Identification Number)
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10 Universal City Plaza, Suite 1130
Universal City, California 91608
818-464-2670
(Address and telephone number of principal executive
offices and principal place of business)
Mark Basile, Chief Financial Officer
eSat, Inc.
10 Universal City Plaza, Suite 1130
Universal City, California 91608
818-464-2670
(Name, address and telephone number of agent for service)
Copy to:
David R. Decker
Arter & Hadden LLP
725 South Figueroa Street, 34th Floor
Los Angeles, California 90017
Pursuant to Rule 429, this Post-Effective Amendment includes a Combined
Prospectus relating to this Registration Statement and Registration Statement
File No. 333-95451.
Pursuant to Rule 429(b), this Post-Effective Amendment also serves as
Post-Effective Amendment No. 3 to Registration Statement File No. 333-95451.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUPPLEMENT, DATED SEPTEMBER 28, 2000,
TO PROSPECTUS, DATED AUGUST 29, 2000,
OF
ESAT, INC.
Effective September 13, 2000, Michael C. Palmer is no longer serving as
President, Chief Executive Officer and Secretary of the company. Chester L.
Noblett, Jr., the current chairman of the board, will be acting CEO, pending a
search for a new CEO. Mark S. Basile, our Chief Financial Officer, has been
elected Secretary of the company. David Pennells has been elected a director.
See "Management" commencing at page 26 of the prospectus for the business
backgrounds of Mr. Noblett, Mr. Pennells and Mr. Basile.
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Prospectus
28,036,389 Shares
eSAT, INC.
Common Stock
Selling stockholders are offering up to 28,036,389 shares of common
stock. We will not receive any of the proceeds from the sale of this common
stock. We will have been paid for all the shares offered prior to the sale of
the shares under this prospectus.
The selling stockholders may sell these shares from time to time in the
over-the-counter market or otherwise.
Our common stock is traded on the OTC Electronic Bulletin Board under
the symbol "ASAT," and on the Deutsche Borse AG Xetra(TM) (Frankfurt, Germany)
under the symbol "ES8." On August 14, 2000, the last reported bid price of the
common stock on the OTC Electronic Bulletin Board was $1.1875 per share.
Wentworth, LLC is an underwriter with respect to the shares it is
offering pursuant to this prospectus.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
August 29, 2000
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You may rely only on the information contained in this prospectus. We
have not authorized anyone to provide information different from that contained
in this prospectus. Neither the delivery of this prospectus nor sale of shares
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these securities in any circumstances under which the offer or
solicitation is unlawful.
TABLE OF CONTENTS
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Page
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Prospectus summary......................................................................... 3
Risk factors............................................................................... 6
Forward-looking statements................................................................. 14
Use of proceeds............................................................................ 14
Price range of common stock................................................................ 14
Dividend policy............................................................................ 15
Capitalization............................................................................. 15
Selected consolidated financial data....................................................... 16
Management's discussion and analysis of financial condition and results of operations...... 18
Business................................................................................... 21
Management................................................................................. 31
Certain transactions....................................................................... 37
Principal stockholders..................................................................... 39
Selling stockholders....................................................................... 42
Description of securities.................................................................. 44
Shares eligible for future sale............................................................ 50
Plan of distribution....................................................................... 51
Legal matters.............................................................................. 52
Experts ................................................................................... 52
Additional information..................................................................... 52
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Until October 8, 2000 (40 days after the date of this prospectus),
all dealers effecting transactions in the common stock may be required to
deliver a prospectus. This is in addition to the obligations of dealers to
deliver a prospectus when acting as underwriters.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the risks of investing in our common stock,
and our financial statements and notes to those statements appearing elsewhere
in this prospectus.
OUR BUSINESS
We were incorporated in the State of Nevada on June 23, 1995 under the
name U.S. Connect 1995, Inc. On October 8, 1998, we became the surviving
corporation in a merger with Technology Guardian, Inc., a California
corporation. As a part of that merger, we changed our name to Technology
Guardian, Inc. We changed our name to eSAT, Inc. on January 26, 1999. In April
2000, we acquired the businesses of PacificNet Technologies, Inc. and
InterWireless, Inc.
Our principal executive offices are located at 10 Universal City Plaza,
Suite 1130, Universal City, California 91608. Our telephone number is
818-464-2670 and our fax number is 818-464-2799. Our Web site address is
www.esatinc.com. Information accessed on or through our Web site does NOT
constitute a part of this prospectus.
Our principal line of business consists of providing products and
services for long haul, or satellite, Internet access and data delivery, last
mile, or wireless and traditional terrestrial, Internet service, and Internet
management services. When combined with satellite delivery, wireless or
traditional terrestrial delivery permits us to broadcast to a distant satellite
reception dish and then re-broadcast from that dish to customers without
satellite reception capability. Our customers are local, national and
international businesses, educational institutions and governmental agencies.
Our long haul, or satellite, Internet business presently is based on
one-way and bi-directional satellite service products which are primarily
targeted at rural customers and the business continuity (disaster recovery)
markets.
We expect our innovative satellite Internet backbone system, known as
SIBONE(TM), to be our primary long haul delivery platform. Our SIBONE system is
now finishing development and testing. SIBONE will be an interconnected network
of satellite based ground stations that act as local access points for customers
that require high capacity access to the Internet. Potential customers include
local telephone companies and local Internet service providers, or ISPs.
Our last mile, wireless Internet access products and Internet management
services are delivered through our recently acquired subsidiaries, PacificNet
and InterWireless. PacificNet provides software support and managed Internet
access to individuals and businesses. InterWireless is a wireless Internet
service provider that provides both traditional and broadband wireless Internet
access services. We currently are able to provide wireless Internet services
only in Southern California, but plan to market the capability on a national and
international basis. Through these two subsidiaries, we will focus on using
technology to provide cost-effective, uniform Internet delivery without
geographic limitations.
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THE OFFERING
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Shares offered.............................. 28,036,389 shares of common stock
Proceeds to us.............................. None. All proceeds will be for the benefit of selling
stockholders who will have previously paid the company
for common stock or convertible preferred stock
pursuant to direct sales or upon exercise of warrants.
Common stock to be outstanding after the
offering.................................... 49,918,410 shares
OTC Electronic Bulletin Board symbol........ ASAT
Deutsche Borse AG Xetra(TM) (Frankfurt, ES8
Germany)
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In addition to 49,918,410 shares of common stock outstanding after the
offering, we are obligated to issue 5,603,773 shares of common stock on exercise
of other outstanding warrants, and 7,685,211 shares of common stock on exercise
of outstanding options. We do not expect these warrants or options to be
exercised in the near future since, in most cases, the exercise price is higher
than the market price for our common stock. To be sure we have enough shares to
complete this offering and honor all exercises of warrants and options, we
expect to increase our authorized common stock from 50,000,000 shares to
100,000,000 shares in our annual shareholders' meeting scheduled for September
15, 2000.
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SUMMARY CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
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YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
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1999 1998 1997 2000 1999
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(RESTATED) (UNAUDITED) (UNAUDITED)
(in thousands except per share data)
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NET REVENUE........................... $ 3,676,217 $ 2,474,617 $2,872,547 $ 2,396,203 $ 1,824,167
Gross margin...................... 77,431 (181,473) 1,200,058 (65,439) (101,511)
Loss from operations.............. (8,084,757) (3,123,514) (291,649) (6,523,577) (3,886,054)
Net income (loss)................... 73,438,652 (93,675,433) (338,160) (1,714,097) 63,904,548
EARNINGS PER COMMON SHARE:
Net income (loss)................... $ 3.50 $ (4.97) $ (0.02) $ (0.08) $ 3.01
=========== ============ ========== =========== ===========
EARNINGS PER COMMON SHARE - ASSUMING
DILUTION
Net income (loss)................... $ 2.77 $ (4.97) $ (0.02) $ (0.08) $ 2.33
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CONSOLIDATED BALANCE SHEET:
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DECEMBER 31, JUNE 30,
1999 1998 2000
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(RESTATED) (UNAUDITED)
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Cash and cash equivalents................... $3,412,205 $2,703,516 $ 667,375
Working capital............................. 1,993,158 2,058,707 (3,609,129)
Total assets................................ 5,980,825 3,973,771 8,732,836
Total stockholders' equity ................. 3,298,674 2,622,993 3,035,507
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(1) These amounts do not include the receipt of net proceeds of $2,633,333 from
the sale of 30,000 shares of Series E 6% Convertible Preferred Stock at $100 per
share, which occurred in August 2000.
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RISK FACTORS
WE HAVE REPORTED LOSSES FROM OPERATIONS FOR OUR LAST THREE YEARS AND FOR THE
SIX MONTHS ENDED JUNE 30, 2000, AND, IF WE DO NOT BECOME PROFITABLE, OUR
BUSINESS WILL BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT WILL
DECLINE.
For the six months ended June 30, 2000, we incurred a loss from operations of
$6,523,577, including all research and development costs. For the fiscal year
ended December 31, 1999, we incurred a loss from operations of $8,084,757 as
compared to a loss from operations of $3,123,514 for the fiscal year ended
December 31, 1998. The losses were primarily due to: (i) employee compensation,
which increased because of additional sales and operations staff hired in 1998
in anticipation of future growth of our operations; (ii) expenses related to
marketing; and (iii) lack of product sales. In addition, we incurred significant
research and development costs associated with new products. There can be no
assurance that we will be able to generate sufficient revenues to operate
profitably in the future or to pay our debts as they become due. The company is
dependent upon successful completion of future capital infusions to continue
operations.
Our net income in 1999 is primarily a result of our method of accounting for
stock-based compensation. We account for stock-based employee compensation
arrangements in accordance with the provisions of APB 25, Accounting for Stock
Issued to Employees, and comply with the disclosure provisions of SFAS 123,
Accounting for Stock-Based Compensation. Under APB 25, compensation cost is
recognized on fixed plans over the vesting period based on the difference, if
any, on the date of grant between the fair value of the company's stock and the
amount an employee must pay to acquire the stock. For variable plans (those
permitting cashless exercise of options), APB 25 requires recognition of
compensation cost over the vesting period based on the difference, if any, on
the period-end date between the fair value of the company's stock and the amount
an employee must pay to acquire the stock. Forfeitures of variable plan options
result in a reversal of previously recognized compensation cost.
Due to the large number of variable plan options we granted in 1998 and the
significant difference between the exercise price of those options and the fair
value of our stock at December 31, 1998, we recognized a substantial amount of
non-cash compensation cost in 1998. Subsequently, a large number of forfeitures
and the re-pricing to market of those options in 1999 caused a considerable
reversal of the previously recognized non-cash compensation cost. The resulting
net income for the year ended December 31, 1999 should not be construed as
profitable operations during that period.
WE ARE HIGHLY DEPENDENT ON THE UNINTERRUPTED OPERATION OF THE NETWORK OPERATIONS
CENTER AT OUR UNIVERSAL CITY, CALIFORNIA, SITE.
We currently have all of the equipment used for our PacificNet
subsidiary's network operations located in our Universal City facility. While it
is protected by standard protective devices such as redundant power supplies,
multiple internet connections, fire systems, climate control, and 24 hour
security/access control, we are at risk for catastrophic events that would
require a backup location. Failure of this equipment for any material length of
time would adversely affect our revenue generated from our managed internet
services business which presently accounts for a substantial portion of our
revenue.
WE ARE CURRENTLY DEPENDENT ON A SINGLE CUSTOMER FOR APPROXIMATELY ONE-THIRD OF
OUR REVENUE.
We provide and manage the actual connection to the Internet to the
subscriber base of a large national telephone dial-up Internet access provider.
Approximately one-third of our revenues are generated by our service to that
company. Loss of that account would have a material adverse effect on our
revenues, which could negatively affect the value of your investment.
WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL
NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS.
We currently use a single satellite to provide satellite Internet
services. There is risk associated with this dependence. There are two types of
possible failures to the satellite: a failure of the individual transponder that
is used and a failure of the entire satellite. If there is a failure of a
transponder, the satellite operator is contractually obligated to move us to
another transponder. This would create a minimum interruption to customers,
likely less than 24 hours. If the satellite itself completely fails, we will
have to move our services to another satellite. Our transmissions conform to
industry standards so there are several possible alternative satellites. Our
current satellite provider engages in quarterly reviews of available
like-satellite space and is ready to contract for that space if needed. If the
entire satellite were to fail, a one to five day outage of services might occur
depending on the availability of other satellites. Additionally, a repointing of
the receiving dishes on the ground would likely be required. The repointing of
the receiving dishes on the ground would cost us approximately $300 per
customer. In the event of any service disruption due to satellite failure, our
customers would be credited for the dollar value of the amount of time they are
without the satellite Internet service. Based on a standard contract paying $495
per month for the use of our GSI(TM) equipment and related satellite Internet
service, this would be equal to $16.50 per day per customer. Nexstream(TM)
based business continuity customers might not be impacted but could cost $27.00
per day. Other Nexstream(TM) customers would represent a potential loss of
between $27.00 and $155.00 per day depending on the level of service subscribed.
In the event of a satellite failure, we could also be subject to
loss-of-business claims, due to the reliance by business customers on the
satellite Internet services we provide. A sustained disruption in satellite
service could materially impact our ability to continue operations.
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WE MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING OUR DOMESTIC AND WORLDWIDE PROPOSED
EXPANSION WHICH WILL RESULT IN OUR BEING A SMALLER AND LESS COMPETITIVE COMPANY.
Over the next two years, we intend to expand our operations domestically
and internationally, and will seek to expand the range of our services and
penetrate new geographic markets.
However, we have no experience in effectuating rapid expansion or in
managing operations which are geographically dispersed. There can be no
assurance that our current management, personnel and other corporate
infrastructure will be adequate to manage our growth. Expansion internationally
will require joint venture partners outside the United States which will provide
capital and personnel to fund the operations internationally. As a company, we
have very limited experience in international joint venture transactions. We
have no joint venture partners at this time. There can be no assurance that we
will be able to successfully joint venture with entities in other parts of the
world, or that joint venture partners will be able to raise the capital and
employ the personnel required to successfully implement worldwide operations.
Accordingly, there is significant risk that we will not be able to meet our goal
of substantial domestic and international expansion within the next two years.
Failure to complete our intended expansion will result in our being a smaller
and less competitive company
WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated in 1995, but did not commence operations until
1997. Since then, our business has been substantially refocused. Thus, we have a
limited operating history upon which an evaluation of us can be based. Our
prospects are subject to the risks, expenses and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
and interactive media products and services. In addition, we will be subject to
all of the risks, uncertainties, expenses, delays, problems and difficulties
typically encountered in the growth of an emerging business and the development
and market acceptance of new products and services. There can be no assurance
that unanticipated expenses, problems or technical difficulties will not occur
which would result in material delays in market acceptance of our products and
services or that our efforts will result in such market acceptance.
TIMING OF ORDERS FOR AND CONTINUED DEVELOPMENT OF OUR SERVICES AND PRODUCTS WILL
CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND CONSEQUENTLY YOU SHOULD NOT RELY ON
THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE PERFORMANCE.
We have experienced material period-to-period fluctuations in revenue
and operating results. We anticipate that these periodic fluctuations in revenue
and operating results will occur in the future. We attribute these fluctuations
to a variety of business conditions that include:
- the volume and timing of orders we receive from quarter to
quarter;
- the introduction and acceptance of our new services and products
and product enhancements by us;
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- purchasing patterns of our customers and distributors; and
- market acceptance of services and products sold by our
distributors.
As a result, we believe that quarterly revenue and operating results are
likely to vary significantly in the future and that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should therefore
not rely on the results of one quarter as an indication of future performance.
OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED.
As is the case with many technology companies, the rapid pace of change
in technology could cause our intellectual property to be challenged. These
challenges could come from stronger companies who believe that the use of our
technology interferes with their use or that they own all of the technology and
related rights. If any of these challenges were successful, our ability to sell
products based on our technology or intellectual property could be severely
impaired.
WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO
MEET THE CHALLENGES OF NEW PRODUCTS AND COMPETITORS WILL REDUCE OUR MARKET SHARE
AND THE VALUE OF YOUR INVESTMENT.
The market for Internet products and computer software is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services. The diverse segments of the
Internet market may not provide opportunities for more than one dominant
supplier of products and services similar to ours. If a single supplier other
than us dominates one or more market segments, our revenue is likely to decline
and we will become a less valuable company.
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND
SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR
REVENUE AND THE VALUE OF YOUR INVESTMENT.
The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition could result in:
- pricing pressures, resulting in reduced margins;
- decreased volume, resulting in reduced revenue; or
- the failure of our products to achieve or maintain market
acceptance.
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Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Each of our products faces
intense competition from multiple competing vendors. Our principal competitors
include Loral, Inc., Hughes Network Systems and Spacenet. Many of our current
and potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
WE MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS WHICH WOULD DIMINISH THE
VALUE OF YOUR INVESTMENT.
Based on current proposed plans and assumptions relating to our
operations, we anticipate that current cash reserves, together with projected
cash flow from operations and the sale of additional securities, will be
sufficient to satisfy our contemplated cash requirements through fiscal 2000.
Thereafter, we will require substantial additional financial resources to fund
our operations. The expansion into new product areas will also require
substantial funding. The failure to acquire additional funding when required
will have a material adverse effect on our business prospects. Without the
proper financing of customer contracts by a finance company or additional
equity, we are likely to have difficulty in sustaining on-going operations.
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
The audit reports accompanying our financial statements for the years
ended December 31, 1998 and 1999 contain a qualification that certain conditions
indicate that we may not be able to continue as a going concern. The financial
statements do not contain any adjustments that might be necessary in such a
case. Note 2 to the financial statements indicates that substantial operating
losses account for this uncertainty. Many investment bankers and investors view
companies with a "going concern" qualification as less desirable for investment.
Accordingly, we may have a more difficult time raising equity capital or
borrowing capital at all on favorable terms. Our suppliers might be less willing
to extend credit. Our potential customers might be less willing to purchase our
products and services if they believe that we will not be viable enough to
provide service, support, back-up, and follow-on products when needed.
Furthermore, we might be disadvantaged in recruiting employees who might be
concerned about the stability of employment with us. Therefore, the "going
concern" qualification can have severe adverse consequences on us.
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WE ARE DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENT
INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS.
Our success in the Internet access business depends on, among other
things, the timely introduction of successful new products or enhancements of
existing products to replace declining revenues from older, less efficient
products. Consumer preferences for software products are difficult to predict,
and few consumer software products achieve sustained market acceptance. If
revenues from new products or enhancements do not replace declining revenues
from existing products, our business, operating results and financial condition
could be materially adversely affected. The process of developing Internet
access products such as ours is extremely complex and is expected to become more
complex. A significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and on our business, operating results and financial condition.
WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE
ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
We are at an early stage of development and our earnings growth depends
primarily upon market acceptance of our products and services. There can be no
assurance that our product development efforts will progress further with
respect to any potential new products or that they will be successfully
completed. In addition, there can be no assurance that our potential new
products will be capable of being produced in commercial quantities at
reasonable costs or that they will achieve customer acceptance.
There can be no assurance that our products and services will be
successfully marketed. In addition to our own direct sales force, we are
dependent on value-added resellers and distributors to market our products.
There is no assurance that any distributor or other reseller will be successful
in marketing our products.
Our success is dependent in part on our ability to sell our products and
services to governmental agencies, including public school districts, and large
business organizations. Selling to governmental agencies and larger companies
generally requires a long sales process, with multiple layers of review and
approval.
In sales to governmental agencies, nonbusiness factors often enter into
the purchase decision. Such factors include the residence and origin of the
supplier of the products, the nature of the supplier and the distributor, the
ethnic and gender characteristics of personnel and owners of the company selling
or distributing the products, political and other contacts, and other peculiar
factors. Accordingly, the success of selling to these potential customers is
uncertain.
We do not have sufficient experience in marketing our products to
determine the optimum distribution methods. It is unclear whether marketing
through distributors or value-added resellers or mass retailers will result in
acceptable sales levels. Accordingly, as we learn
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more, we may have to revise our sales, distribution, and marketing strategies
and implementation.
WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR
PROSPECTS.
Except for a license from the Federal Communications Commission, we are
not currently subject to direct regulation by any government agency in the
United States, other than regulations applicable to businesses generally. There
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Such laws or regulations
could limit the growth of the Internet, which could in turn decrease the demand
for our proposed products and services or increase our cost of doing business.
Any new legislation or regulation or the application of existing laws and
regulations to the Internet in unexpected ways could have an adverse effect on
our business and prospects.
WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE
PRODUCTS AND SERVICES WE PROVIDE.
Because materials may be downloaded by the Internet services which we
operate or facilitate and may be subsequently distributed to others, there is a
possibility that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature and content of such materials. Such claims have sometimes been
successful against Internet service providers. Our general liability insurance
might not cover potential claims of this type or might not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
or legal defense expenses that are not covered by insurance or that are in
excess of insurance coverage could have a material adverse effect on our
business, operating results and financial condition.
LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
AND PROSPECTS.
Our success will be dependent largely upon the personal efforts of our
Chief Executive Officer, Michael C. Palmer, and our Chairman of the Board,
Chester L. Noblett, as well as other senior managers. The loss of their services
could have a material adverse effect on our business and prospects. We have no
life insurance on any of our officers. Mr. Palmer's and Mr. Noblett's services
are governed by agreements. Our success is also dependent upon our ability to
hire and retain additional qualified management, marketing, technical, financial
and other personnel. Competition for qualified personnel is intense and there
can be no assurance that we will be able to hire or retain qualified personnel.
Any inability to attract and retain qualified management and other personnel
could have a material adverse effect on us.
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IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has
been in continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has
been in continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading
in the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker-dealers
who recommend such securities to persons other than their established customers
and institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
YOU COULD SUFFER DILUTION OF YOUR INVESTMENT IF SHARES ARE SOLD PURSUANT TO AN
EQUITY CREDIT ARRANGEMENT, CERTAIN WARRANTS ARE EXERCISED, PREFERRED STOCK IS
CONVERTED INTO COMMON STOCK, OR STOCK OPTIONS ARE EXERCISED.
As of August 14, 2000, we have a total of 21,882,021 shares of common
stock outstanding, exclusive of shares reflected in this prospectus as being
held for sale by the selling stockholders. We have issued warrants to purchase
8,473,708 shares of common stock (including shares of common stock underlying
warrants registered in this prospectus) at a weighted average price of $4.57 per
share, as well as options to purchase 7,685,211 shares of common stock at a
weighted average price of $3.64 per share. We have issued $5,000,000 of Series C
Convertible Preferred Stock that, based on a minimum conversion price of $2.50
per share, will convert into 2,000,000 shares of our common stock. We have
issued $7,500,000 of Series D Convertible Preferred Stock that, based on a
minimum conversion price of $2.50 per share for $1,500,000 of Series D shares
and an August 14, 2000 conversion price of $1.0147 for $6,000,000 of Series D
shares, will convert into 6,513,078 shares of our common stock. We have issued
$3,000,000 of Series E Convertible Preferred Stock that, based on the August 14,
2000 conversion price of $1.0147 per share, will convert into 2,956,539 shares
of our common stock. We have entered into a $7,000,000 private equity credit
line agreement, that based on the minimum put price of $0.67 per share, will
convert into 12,015,000 shares of our common stock. Issuance of any of these
shares will dilute your interest in our company.
12
<PAGE> 15
ISSUANCE OF OUR AUTHORIZED PREFERRED STOCK COULD DISCOURAGE A CHANGE IN CONTROL,
COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND COULD RESULT IN THE
HOLDERS OF PREFERRED STOCK BEING GRANTED VOTING RIGHTS THAT ARE SUPERIOR TO
THOSE OF THE HOLDERS OF COMMON STOCK.
We have issued 155,000 shares of preferred stock. All have voting rights
on all matters decided by shareholders. The outstanding preferred shares have
the right to cast an aggregate of 11,469,617 votes as of August 14, 2000, on all
matters on which stockholders may vote. We are authorized to issue an additional
9,845,000 shares of preferred stock without obtaining the consent or approval of
our stockholders. The issuance of preferred stock could have the effect of
delaying, deferring, or preventing a change in control. We may also grant
superior voting rights to the holders of preferred stock. Any issuance of
preferred stock could materially and adversely affect the market price of the
common stock and the voting rights of the holders of common stock. The issuance
of preferred stock may also result in the loss of the voting control of holders
of common stock to the holders of preferred stock.
WE WILL PAY NO DIVIDENDS TO YOU.
We have not paid, and do not expect to pay, any dividends on common
stock in the foreseeable future.
MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT
THE MARKET PRICE FOR THE SHARES.
As of August 14, 2000, there are 7,543,995 shares of our common stock
outstanding which cannot be sold on the public market. Of these shares,
3,252,184 shares are held by directors, officers, or stockholders who have
beneficial ownership of 10% or more of the outstanding shares, including shares
subject to options held by them. 4,291,811 shares are held by other
stockholders. These shares will become eligible for trading at various dates in
2000 and 2001. In addition, shares of common stock which may be acquired
pursuant to outstanding convertible preferred stock or warrants will be eligible
for trading at various dates after they are acquired. We are unable to predict
the effect that sales of such shares may have on the then prevailing market
price of the common stock. Nonetheless, the possibility exists that the sale of
these shares may have a depressive effect on the price of our common stock.
13
<PAGE> 16
FORWARD-LOOKING STATEMENTS
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the material set forth under "Prospectus summary," "Management's
discussion and analysis of financial condition and results of operations," and
"Business," as well as within this prospectus generally. In addition, when used
in this prospectus, the words "believes," "intends," "plans," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to a number of risks and
uncertainties. Actual results could differ materially from those described in
the forward-looking statements as a result of the risk factors set forth and the
information provided in this prospectus generally. We do not intend to update
any forward-looking statements.
USE OF PROCEEDS
All of the shares of common stock offered by this prospectus are being
offered by the selling stockholders. We received or will receive money from the
sale of common stock under a Private Equity Credit Agreement with Wentworth LLC,
described on page 20, as well as the sale of shares of convertible preferred
stock that were converted, or are convertible, into the shares of common stock
offered in this prospectus. We also received, or will receive, money from the
exercise of warrants to purchase common stock which is offered by this
prospectus. This money was, or will be, used for working capital and general
corporate purposes. We will not receive any additional proceeds from the sale of
shares by the selling stockholders. For information about the selling
stockholders, see "Selling stockholders."
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Electronic Bulletin Board under
the trading symbol "ASAT." The following table sets forth the high and low bid
prices for our common stock since the beginning of the fiscal year 1997. The
quotations reflect inter-dealer prices, with no retail mark-up, mark-down or
commissions, and may not represent actual transactions. The information
presented has been derived from National Quotation Bureau, Inc.
<TABLE>
<CAPTION>
1997 Fiscal year High Bid Low Bid
---------------- -------- -------
<S> <C> <C>
First quarter 25.00 6.25
</TABLE>
14
<PAGE> 17
<TABLE>
<S> <C> <C>
Second quarter 12.50 1.56
Third quarter 12.50 1.56
Fourth quarter 12.50 1.00
1998 Fiscal year
----------------
First quarter 1.00 .05
Second quarter .05 .05
Third quarter 5.50 .625
Fourth quarter 16.00 5.00
1999 Fiscal year
----------------
First quarter 22.6875 10.50
Second quarter 14.25 7.876
Third quarter 9.3750 4.375
Fourth quarter 6.0625 1.1875
2000 Fiscal year
----------------
First Quarter 7.375 3.0625
Second Quarter 4.3125 1.5625
Third Quarter (through August 14, 2000) 1.9375 1.125
------- ------
</TABLE>
On August 14, 2000, the last reported trade for our common stock was
$1.1875.
As of August 14, 2000, there were 688 holders of record of our common
stock.
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion
of our business and for general corporate purposes. We have not declared or paid
any cash dividends on our common stock. We do not anticipate paying cash
dividends in the foreseeable future except possibly on preferred stock. The
terms of our outstanding preferred stock prohibit the payment of dividends on
our common stock unless all dividends accrued on the preferred stock have been
paid.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1999 and our unaudited capitalization as of June 30, 2000:
15
<PAGE> 18
You should read this table together with "Management's discussion and
analysis of financial condition and result of operations," consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000(1)
----------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred stock - Series D, cumulative,
fully participating, convertible, $0.001
par value Authorized - 75,000 shares
Issued and outstanding - 75,000 shares
(Aggregate liquidation preference
$7,499,925 in 2000) $ -- $ 75
Preferred stock - Series C- cumulative,
fully participating convertible, $0.001
par value Authorized - 50,000 shares
Issued and outstanding - 50,000 shares
(Aggregate liquidation preference
$4,999,500 in 1999) 500 500
Preferred stock - Series A, cumulative,
fully participating, convertible, $0.001
par value Authorized - 2,000,000 shares
Issued and outstanding - 1,000,000 shares
(0 shares outstanding at June 30, 2000)
(Aggregate liquidation preference $1,990,000
in 1999) 10,000 --
Common Stock - $0.001 par value Authorized -
50,000,000 shares Issued and outstanding -
21,095,214 shares at December 31, 1999 21,095 21,721
Additional paid-in capital 25,762,197 25,862,006
Retained deficit (20,936,608) (22,848,795)
----------- -----------
4,857,184 3,035,507
Less: Subscriptions receivable (1,558,510) --
---------- ----------
Total stockholder's equity $3,298,674 $3,035,507
========== ==========
</TABLE>
(1) These amounts do not include the receipt of net proceeds of $2,633,333 from
the sale of 30,000 shares of Series E 6% Convertible Preferred Stock at $100 per
share, which occurred in August 2000.
The information provided above excludes:
- 8,473,708 shares of common stock issuable upon exercise of
warrants,
- 7,685,211 shares of common stock issuable upon exercise of
outstanding options, and
- 11,469,617 shares issuable on conversion of outstanding preferred
stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements and the "Management's
discussion and analysis of financial condition and
16
<PAGE> 19
results of operations" and other financial information included elsewhere in
this prospectus. The consolidated statements of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999 are derived from and qualified by reference to the
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statements of operations data for the six months
ended June 30, 1999 and the consolidated balance sheet data at June 30, 2000
have been derived from our unaudited consolidated financial statements but have
been prepared on the same basis as our audited consolidated financial statements
which are included in this prospectus. In our opinion, these unaudited
consolidated financial statements include all adjustments, consisting of
normally recurring adjustments, considered necessary for a fair presentation of
our consolidated financial position and results of operations for that period.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------ -------------------------------
1999 1998 1997 2000 1999
------------ ----------- ----------- ------------ ------------
(RESTATED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE $ 3,676,217 $ 2,474,617 $2,872,547 $ 2,396,203 $ 1,824,167
Gross margin 77,431 (181,473) 1,200,058 (65,439) (101,511)
Loss from operations (8,084,757) (3,123,514) (291,649) (6,523,577) (3,886,054)
Net income (loss) 73,438,652 (93,675,433) (338,160) (1,714,097) 63,904,548
EARNINGS PER COMMON SHARE:
Net income (loss) $ 3.50 $ (4.97) $ (0.02) $ (0.08) $ 3.01
=========== ============ ========== =========== ===========
EARNINGS PER COMMON SHARE -- ASSUMING
DILUTION
Net income (loss) $ 2.77 $ (4.97) $ (0.02) $ (0.08) $ 2.33
=========== ============ ========== =========== ===========
</TABLE>
CONSOLIDATED BALANCE SHEET:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
JUNE 30,
1999 1998 2000
----------- -------------- -----------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $3,412,205 $2,703,516 $ 667,375
Working capital 1,993,158 2,058,707 (3,609,129)
Total assets 5,980,825 3,973,771 8,732,836
Preferred stock - Series C - cumulative, fully participating 500 -- 500
Preferred stock - Series A - cumulative, fully participating 10,000 -- --
Preferred stock - Series D - cumulative, fully participating -- -- 75
Total stockholders' equity 3,298,674 2,622,993 3,035,507
</TABLE>
See note 1(N) of notes to consolidated financial statements for a
discussion regarding the computation and presentation of basic and diluted net
loss per share.
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT, AS WELL AS "RISK FACTORS."
RESULTS OF OPERATIONS
JUNE 30, 2000 AS COMPARED TO JUNE 30, 1999
Revenues totaled $2,396,203 and $1,824,167 for the six months ended June
30, 2000 and 1999, respectively. The 2000 revenue reflects primarily an increase
in customers from our VISP business and to a lesser extent, sales of our
disaster recovery products and services. The prior year balance reflects sales
of our first-generation satellite products and services.
For the six months ended June 30, 2000 and 1999, cost of sales was
$2,461,642 and $1,925,678, respectively. The 2000 cost of sales reflects
personnel costs to support the VISP revenue, satellite access fees and various
distribution and provider service fees. The 1999 balance is comprised primarily
of personnel costs to support the VISP revenue, satellite access fees and
hardware costs.
General and administrative expenses totaled $6,458,138 for the period
ended June 30, 2000 as compared to $3,784,543 for the prior year period. The
increase in expenses is due to higher levels of staffing and compensation,
increases in professional fees paid to outside attorneys and accountants,
increased research and development expenditures and the recognition of SFAS 123
expense relating to the issuance of common stock warrants.
Other income, which represents primarily a compensation adjustment
recognized under APB 25, totaled $6,960,934 and $67,796,002 for the six
months ended June 30, 2000 and 1999, respectively.
1999 AS COMPARED TO 1998
During fiscal years 1998 and 1999, we experienced difficulties selling
our products and collecting our accounts receivable. Our first product offering,
the unidirectional GSI(TM) product line, experienced technical difficulties due
to its reliance on outbound telephone lines and other Internet service providers
for its upstream connection to the Internet. During fiscal 1999, we worked on a
solution to this technical problem with the GSI(TM) product line, as well as the
development and market launch of service with our bi-directional Nexstream(TM)
product that utilizes a satellite connection for both upstream and downstream
connections to the Internet.
Revenues totaled $3,676,217 and $2,474,617 for the years ended December
31, 1999 and 1998, respectively. The 1999 revenue reflects primarily revenue
from our VISP business, and fourth quarter shipments of our Nexstream(TM)
product, whereas revenue from our VISP business, and our first generation
satellite products are represented in the 1998 balance.
For the years ended December 31, 1999 and 1998, cost of sales were
$3,598,786 and $2,656,090, respectively. Cost of sales includes personnel to
support the VISP business, the cost of hardware and software shipped to
customers, satellite access time purchased from a third party and inventory
write-offs.
For the years ended December 31, 1999 and 1998, operating expenses were
$8,162,188 and $2,942,041, respectively. The increase in operating expenses for
fiscal 1999 is due to higher levels of staffing and compensation, increased
marketing expenditures, increased research and development expenditures and
higher levels of professional fees paid to outside accountants and attorneys.
Other income in 1999 and 1998 reflects primarily a compensation
adjustment recognized under APB 25.
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<PAGE> 21
1998 as compared to 1997
In fiscal 1998, revenue decreased by $398,000, or 14%, in comparison to
fiscal 1997. This revenue decline is directly attributable to our shift to
high-speed satellite Internet products and services and away from the sale of
networking and computing products and services offset by an increase in our VISP
revenue. In the first quarter of 1998, we stopped selling networking and
computing products and services. In the fourth quarter of 1998, we stopped
selling our initial satellite Internet products and services altogether, pending
the completion of our GSI(TM) products. During 1998, we engaged in capital
raising efforts and the development of our GSI(TM) Internet related products and
services along with beta marketing and testing.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed primarily from the sale of preferred
and common stock in 1999 and 1998. At June 30, 2000, we had cash and cash
equivalents on hand of $667,375 and working capital of $(3,609,129) as compared
to cash and cash equivalents of $3,412,205 and working capital of $1,993,158 at
December 31, 1999. At December 31, 1998, we had cash and cash equivalents of
$2,703,516 and working capital of $2,058,707.
Net cash used in operating activities of $4,056,933 for the six months
ended June 30, 2000 and $6,230,977 and $2,676,465 for the years ended December
31, 1999 and 1998, respectively, was primarily attributable to operating losses
as adjusted for compensation expense recognized under APB 25 and SFAS 123.
Net cash used in investing activities was $4,993,762 for the six months
ended June 30, 2000 and $957,481 and $398,801 for the years ended December 31,
1999 and 1998, respectively. These expenditures were primarily for the purchase
of fixed assets in 1999 and 1998, and for the purchase of InterWireless, Inc. in
2000.
Net cash provided by financing activities of $6,305,865 for the six
months ended June 30, 2000 and $7,897,147 and $5,874,347, for the years ended
December 31, 1999 and 1998, respectively, resulted primarily from the net
proceeds of the sale of preferred and common stock.
To the extent our revenues increase in the coming twelve months, we
anticipate significant increases in operating expenses, working capital and
capital expenditures. The cost to purchase additional fixed assets, primarily
wireless and satellite transmission and receiving equipment, and to finance
working capital requirements is approximately $25,000,000.
In the fourth quarter of 1999, we entered into an agreement with
Vantage Capital, Inc. ("VCI") for the purpose of raising capital. Pursuant to
that agreement, a total of $2,000,000 of Series A 12% Convertible Preferred
Stock was subscribed to VCI, and $5,000,000 of Series B 12% Convertible
Preferred Stock was subscribed to Corporate Financial Enterprises, Inc. ("CFE").
In addition, $5,000,000 of Series C 6% Convertible Preferred Stock was issued to
Wentworth, LLC, a third-party investor. Through December 31, 1999, we had
received a total of $1,100,000 on the Series
19
<PAGE> 22
A Preferred Stock subscription, $1,000,000 on the Series B Preferred Stock
Subscription and the Series C Preferred Stock was fully paid.
Effective December 31, 1999, we entered into an agreement with CFE
which canceled the Series B Preferred Stock and settled a dispute with CFE
regarding payment for certain common stock previously issued to CFE and its
clients. As a part of that settlement, we received an additional $558,510 from
CFE, and we retained the $1,000,000 deposited on the Series B Preferred Stock.
In April 2000, all of the outstanding Series A Preferred Stock were
converted into 550,000 shares of common stock.
In April 2000, we entered into an agreement with Wentworth, LLC for the
purpose of raising additional capital. Pursuant to that agreement, a total of
$7,500,000 of Series D 6% Convertible Preferred Stock was sold. In addition to
the shares purchased, the agreement calls for the issuance of warrants to
purchase 1,283,422 shares of common stock at an initial exercise price of
$3.9844 per share.
In August 2000, we entered into a further agreement with Wentworth, LLC
for the purpose of raising additional capital. Pursuant to that agreement, a
total of $3,000,000 of Series E 6% Convertible Preferred Stock was sold. As a
part of the transaction, warrants to purchase 666,075 shares of common stock at
an exercise price of $1.5234 per share were issued to Wentworth, LLC.
Pursuant to a Private Equity Credit Agreement, dated August 9, 2000, an
equity line of credit is also available from Wentworth, LLC. Pursuant to that
equity line, when called for by us, Wentworth, LLC has agreed to purchase up to
an additional $7,000,000 of the company's common stock. The purchase price will
be approximately 90% of fair market value of our common stock on the date we
request the purchase. Those shares have been registered in advance of their sale
to Wentworth, LLC and are included in this prospectus. Purchases must be in
tranches of not more than $2,000,000. We have agreed to call for a minimum of
$5,000,000 from Wentworth, LLC on or before August 8, 2001, or we will be liable
for a significant penalty. In addition, except in certain circumstances, we have
agreed not to sell additional common stock to a third party within 30 days
before or after a sale to Wentworth, LLC, under this agreement without
Wentworth's consent. Violation of this provision will also subject us to a
substantial penalty. As a part of any purchase of common stock by Wentworth, LLC
pursuant to the equity line, it will be issued warrants to purchase a number of
shares of our common stock equal to 15% of the amount raised. Such warrants will
have an exercise price equal to 125% of average closing bid prices for the
lowest five of the ten trading days prior to the closing of purchase. Shares
underlying the warrants are included in this prospectus.
We believe that the receipt of the net proceeds from the preferred stock
described above plus cash generated internally from sales and externally from
the Private Equity Credit Agreement and other financing arrangements will be
sufficient to satisfy our future operating, working capital and other cash
requirements for at least the next twelve months. We believe that we have
sufficient internal and external resources to fund current operations, develop
new or enhanced products and/or services, and to respond to competitive
pressures and acquire complementary products, businesses or technologies.
YEAR 2000 COMPLIANCE
We experienced no interruptions in our operations when the calendar year
changed to the year 2000. We believe that our products and services, and
products which we purchase from third party vendors, are designed to operate
continuously regardless of date changes.
CHANGE IN ACCOUNTANTS
We dismissed Lichter and Associates as our independent accountant,
effective November 30, 1999. Lichter and Associates' report on the financial
statements for 1998 and 1997 did not contain an adverse opinion or a disclaimer
of opinion, nor was it qualified or modified, with one exception. The auditor's
report accompanying the financial statements in Amendment No. 1 to Form 10 filed
with the SEC on October 29, 1999 included the following qualification: "As
discussed in Note Q to the financial statements, the Company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note Q. The financial
statements do not include an adjustment that might result from the outcome of
this
20
<PAGE> 23
uncertainty." The decision to change accountants was approved by the Board of
Directors, including the audit committee. During the period preceding the
dismissal, there were no disagreements with Lichter and Associates on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
BUSINESS
OVERVIEW
We are a global broadband Internet service provider. We provide a single
source for long haul, or satellite, last mile, or wireless, broadband delivery
and turnkey Internet products and services. We will soon be positioned to offer
instant broadband infrastructure anywhere through our global satellite backbone
network (in its final development style), our Interwireless subsidiary (for
wireless, last mile), and our PacificNet subsidiary (for network management).
We plan to be a geographically diverse satellite Internet service
provider through the establishment of joint ventures in various countries. We
expect to finance the expansion either through financing provided by the parties
wishing to provide the service internationally, or through capital generated by
operations and/or issuing additional securities.
From inception, we have incurred significant losses totaling
approximately $22,850,000. Furthermore, we anticipate incurring additional
losses in the foreseeable future as we grow and complete the development of our
products. We operate in a highly competitive market and our success will depend
on our ability to compete in this marketplace. We have no assurance of market
acceptance of our products and we have no assurance that our marketing and
distribution methods will be successful.
OUR STRATEGY
We expect growth in demand for Internet access on a worldwide basis. Our
strategy is based on the development and marketing of our products and services
in three basic areas.
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<PAGE> 24
Satellite Services. We currently operate a one-way and bi-directional
satellite Internet service which is primarily targeted to rural customers and
the business continuity (disaster recovery) market. The related Internet
service is provided through our Raleigh, North Carolina, network operations
center. We will continue to service this market, although it will not be
the principal focus of our satellite services in the future.
Our innovative satellite Internet backbone system, known as SIBONE, is
now finishing development and testing. It will be targeted to regional and
global Internet and telephone long-haul carrier markets. We expect SIBONE to be
our primary long-haul delivery platform. The ideal customers for the SIBONE
service are local telephone companies and/or Internet service providers. We plan
for SIBONE to eventually become a global Internet backbone. In Europe, Asia and
South America, we plan to co-own eSat Europe, eSat Asia and eSat South America,
respectively, with regional partners. The regional partners will be selected
based on their ability to set up licensing agreements with candidate local
companies for SIBONE and their ability to provide local exchanges at these
SIBONE locations. The local licensees will be required to handle government
permitting and licensing requirements, construction, marketing, sales and
operations and construction. The local licensees will be allowed to license and
sell eSat's wireless and ISP Management offering.
Wireless Services. We are able to address the problem of delivering
Internet content from a satellite receiving station to the end-user (the
so-called last mile) using wireless transmission technology. In conjunction
with SIBONE, we can deploy anywhere in the world a completely wireless
broadband Internet service that can bypass existing fibreoptic infrastructure.
We plan to build out the necessary wireless infrastructure in Southern
California as soon as possible. We plan to selectively build necessary
infrastructure in other areas of the United States and abroad.
Internet Management. The acquisition of PacificNet provides us with a
proprietary "Virtual" Internet service provider (V-ISP) product and service, as
well as the ability to offer both network management and data center services
through our facility in Universal City. The V-ISP provides private "branded" ISP
capabilities to partner companies who wish to focus on the marketing and content
side of running an ISP without concern for the hardware, maintenance and
administration components of ISP management. The network management service,
which currently monitors all V-ISP and wireless operations, will be expanded to
monitor the global SIBONE network. We also offer customers the ability to locate
their Internet server hardware at our secure facility, from which we provide
them high-capacity Internet access. We plan to continue to identify potential
candidates for our V-ISP products using our ability to provide low-cost service
as a key discriminator. We also plan to continue to sell our services to
businesses, organizations and affinity groups interested in outsourcing ISP,
network management, co-location and data center services or wanting to act
independently as an ISP.
HISTORICAL SUMMARY OF THE COMPANY
We were incorporated on June 23, 1995, under Nevada laws, as "U.S.
Connect 1995, Inc.," for the purposes of marketing and servicing transaction
processing services, prepaid long distance cards, ATM machines and payment
systems to small-to-medium sized merchants. In October 1995, we made a public
offering of our common stock from which we derived gross proceeds of
approximately $100,000. Prior to October 1998, we had not commenced operations
22
<PAGE> 25
and were seeking to establish a new business. On October 8, 1998, we became the
surviving company of a merger with Technology Guardian, Inc., a California
corporation ("TGI"). All the issued and outstanding shares of TGI were exchanged
for shares of our common stock. In connection with the merger, we changed our
name to Technology Guardian, Inc., and succeeded to the business of TGI, which
was providing computer network installation services and the related sale of
personal computers and telecommunications equipment necessary for the
configuration of local area networks and conducting research and development of
satellite-based services. We changed our name to "eSAT, Inc." on January 26,
1999.
Research and development began in late 1996 for the satellite Internet
access products and services. The development of the satellite Internet products
and services continued during 1997 and into the first quarter of 1998. In the
first quarter of 1998, we terminated our sales of network computer related
products and concentrated entirely on the completion of our satellite Internet
access products and services. In the second quarter of 1998, we started beta
sales and installation of our initial (first generation) satellite Internet
access products. Beta sales involve the sales of products and services which
have been developed in a laboratory setting but have not been tested in actual
use. Beta installation means the first installations in a commercial setting,
often at a discount or at no cost in order for us to obtain additional
information for improving and completing the products and services. Through the
end of 1998, we beta tested our first generation satellite Internet product and
services. Beta testing on the first generation of products was terminated in
December 1998, such testing having been completed to our satisfaction.
In the fourth quarter of 1998, we initiated development of a second
generation satellite Internet product and related satellite Internet service.
Development of the second generation of satellite Internet products and services
and beta testing of them was completed to our satisfaction in January 1999. They
were incorporated into our one-way satellite services.
Finally, in the fourth quarter of 1998, we completed installation of our
equipment at a leased network operations center ("NOC") in Raleigh, North
Carolina. The NOC houses our computer equipment and software, functions as a
junction point for all the Internet related data traffic from our customers and
acts as the uplink to the satellites. We contract with third parties for
segments of satellite time that we then resell to our customers.
During the second quarter of 1999, we launched our bi-directional
satellite product.
On April 13, 2000, we acquired all of the outstanding common stock of
PacificNet, a provider of software support and managed Internet access to
individuals and businesses, in a merger transaction. At the same time, we also
purchased all of the outstanding common stock of PacificNet's sister company,
InterWireless, a wireless Internet service provider that provides both
traditional and broadband wireless Internet access. We continue to operate the
businesses of PacificNet and InterWireless and have moved our headquarters to
their offices in Universal City, California. With the acquisition of PacificNet
and InterWireless, our business focus has evolved further to include ISP
management services and last mile wireless Internet content delivery services.
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<PAGE> 26
]
PRODUCTS AND SERVICES
Our products and services fall into three general categories: long haul,
or satellite, delivery of Internet content; last mile, or wireless and
traditional cable, delivery of Internet content; and Internet management
services for other Internet service providers.
LONG HAUL/SATELLITE. SATELLITE INTERNET BACKBONE ("SIBONE"(TM)) is a
patent pending satellite network architecture currently under development. It is
an interconnected network of satellite-based high bandwidth ground stations that
act as local network access points for customers who require high capacity
connections to the Internet. We believe that SIBONE will be our primary long
haul delivery platform. The core element of this network is a proprietary
technology known as Virtual On-Board Switching (VOS(TM)). Designed for
satellites in geosynchronous earth orbit, VOS adds a new dimension to existing
satellites without requiring any modifications by the satellite operator. The
overall effect is the creation of an advanced communication system, using
readily available satellite capacity, which offers a cost-effective alternative
to expensive satellites with on-board switching capability. This product is
uniquely suited for customers such as telephone and cable companies, Internet
service providers and competitive local exchange carriers.
In addition to SIBONE, we offer one-way and bi-directional satellite
Internet service primarily to rural and disaster recovery customers. These
services use existing technology.
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<PAGE> 27
LAST MILE DELIVERY. Our subsidiary, InterWireless, is a wireless Internet
service provider. It utilizes technology which integrates a combination of
wireless last mile hardware and software to deliver two way fixed wireless
broadband service at speeds many times faster than DSL, Cable modem or dedicated
leased lines. InterWireless has three years of experience in this cutting edge
technology and has conducted an exhaustive proof of concept research and
implementation study using all available technologies. InterWireless currently
has state-of-the-art radio frequency transmitting equipment on major
mountaintops (29 total, 22 exclusive and 7 non-exclusive) surrounding the Los
Angeles Region. A Southern California expansion plan has been developed.
Although InterWireless' wireless services are currently local to the Southern
California market, we plan to expand it and market its technology and knowledge
base worldwide.
ISP MANAGED SOLUTIONS. Our PacificNet subsidiary offers a wide range of
services under the product name V-ISP or Virtual Internet Service Provider. The
V-ISP product is geared to companies who currently or wish to offer ISP services
without the burden of investing in and maintaining the "back office" portion of
an ISP business. The VISP product is completely customized to meet the
customers' branding requirements and is operated by PacificNet in its network
operations center. Services include user sign-up, billing, authentication,
email, news, technical support and access to more than 1,100 dial-up locations
throughout the world.
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<PAGE> 28
MARKETING AND SALES
Satellite. Our one-way and bi-directional satellite services are sold
directly to small to enterprise-size businesses and through a nationwide network
of value added resellers in a variety of markets including education,
hospitality, government, entertainment and law enforcement. In addition, these
services are marketed in the business continuity market to businesses with
mission-critical applications as a back up to terrestrial infrastructure.
Additionally, our SIBONE technology will be marketed as a "long haul"
solution to international and regional telephone companies, cable operators
and/or Internet service providers. Our distribution strategy is to sell the
system to local and regional joint venture partners who will be responsible for
marketing and selling SIBONE product and services directly to customers in their
target markets. We are currently in the process of identifying and negotiating
with various local and regional partners in Asia, Central and South America and
areas of Eastern Europe.
Wireless. We plan on marketing our high-speed fixed wireless offering as
a "last mile" delivery solution to small, medium and enterprise-size businesses
in our service coverage areas. Our initial service launch will be targeted to
local businesses in the West Los Angeles region. Future plans include extending
our services to additional markets in Southern California and eventually
marketing our wireless services to other areas of the U.S. and abroad.
ISP Services. We currently sell our Internet management services to
enterprise-size businesses, organizations and affinity groups interested in
outsourcing ISP, network management, co-location and data center services or who
want to act independently as an ISP. Currently, we market primarily through
strategic partners and direct sales. In the future, we plan to expand our direct
sales efforts and market our services to membership-based organizations. We also
anticipate building a value added reseller network to assist our sales efforts.
Our future marketing strategy involves integrating each of our services
in an effort to market a complete, end-to-end, connectivity service to customers
on a global scale.
We employ a sales staff of 12 sales people dedicated to our core
businesses. They focus their efforts on organizing incoming leads, establishing
contact with potential customers and the closure of sales to a wide variety of
businesses and consumers.
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DIVERSIFICATION OF BUSINESS
Approximately one-third of our consolidated revenue is currently being
derived from providing V-ISP services to Genuity, Inc. As we introduce more of
our products to the marketplace, we expect this percentage to decline.
BACKLOG OF ORDERS
We currently do not have a backlog of orders.
INTELLECTUAL PROPERTY
We believe that our intellectual property is an important factor in
maintaining our competitive position in our core eSat businesses, as well as the
businesses of PacificNet and InterWireless. To protect our proprietary rights,
we rely generally on patent, copyright, trademark and trade secret laws, as well
as confidentiality agreements with our employees, consultants, vendors and
corporate business partners. Despite these protections, a third party could,
without authorization, copy or otherwise obtain and use our products or
technology to develop similar technology. Moreover, our agreements with
employees, consultants and others who participate in product and service
development activities may be breached, we may not have adequate remedies for
any breach, and our trade secrets may become known or independently developed by
competitors.
Patents. We currently have filed two pending patent applications. In
addition, we are in the process of filing additional patent applications for
devices and processes directly and indirectly related to the initial two
filings. Any patent applications may not be granted, future patents may be
challenged, invalidated or circumvented, and the rights granted under a patent
that may be issued may not provide competitive advantages to us. Many of our
current and potential competitors dedicate substantially greater resources to
protection and enforcement of intellectual property rights, especially patents.
If a blocking patent has been issued or is issued in the future, we would need
either to obtain a license from the holder of the patent or to design around the
patent. We may not be able to obtain a required license on acceptable terms, if
at all, or to design around the patent.
Trademarks. We have applied for registration of all of our primary
trademarks in the United States, including "eSat," "SatBone," "S-Bone,"
"Sibone," "VOS," and "Virtual Onboard Switching." We intend to continue to
pursue the registration of these and certain of our other trademarks in the
United States and in other countries; however, we cannot be sure that we can
prevent all third party use of our trademarks. We have obtained the Internet
domain name "esatinc.com" but we are aware that an Irish telecommunications
company has the same name ("ESAT") and the Internet domain name "esat.com." We
have not been asked to cease using the name "eSat."
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Copyrights. Software has been developed for eSat, PacificNet, and
InterWireless that is protected by copyright law. There is no assurance that the
steps we take will be adequate to protect these rights or that we will be
successful in preventing the illegal duplication, distribution or other use of
our software. Our failure to adequately limit the unauthorized redistribution of
our software could result in litigation, which could harm our business.
The laws of some foreign countries do not protect our proprietary rights
to the same extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
jurisdictions.
We rely on technology and other proprietary matter that we license from
third parties, including software and images that are integrated with internally
developed software and used in our products and services. Third party licenses
may not continue to be available to us on commercially reasonable terms.
The loss of any of these rights could harm our business.
Third parties may assert infringement claims against us. From time to
time we may be subject to claims in the ordinary course of our business,
including claims of alleged infringement of the trademarks, patents and other
intellectual property rights of third parties by us or our users. Any such
claims, or any resultant litigation, should it occur, could subject us to
significant liability for damages and could result in the invalidation of our
proprietary rights. In addition, such litigation could be time consuming and
expensive to defend, and, even if we were to prevail, could result in the
diversion of our time and attention, any of which could materially and adversely
affect our result in limitations on our ability to use such trademarks, patents
and other intellectual property unless we enter into arrangements with the
appropriate third parties, which may be unavailable on commercially reasonable
terms.
COMPETITION
We compete in the market for providing Internet access services to the
business, government, education and nonprofit sectors.
We anticipate competition from Internet service providers (ISPs) which
provide satellite downlink data transmission in the commercial/business,
government and education sectors. Our competitors also include the established
ISPs, which offer a variety of connection features and speeds of access. Some
use telephone lines, some use television cable systems, and others offer
satellite focused services. There are numerous providers of these services and
no one provider dominates the market. Many service providers are affiliated with
telephone or cable television companies which provide capital resources and
customer marketing opportunities unavailable to us. At this time, we believe no
competitor has a dominant position in the worldwide ISP market segment.
We have not established a competitive position in the market place,
since we have only recently commenced the marketing and sales of our products.
As a result, potential customers are unable to evaluate other customers'
experiences in using our products. This lack of track
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<PAGE> 31
record might dissuade some customers from purchasing our products until there is
a greater customer base and a broader evaluation of the quality and
effectiveness of our products and services.
We compete principally on price, performance, and availability of
service. The service is available in any location, particularly remote
locations, due to the wide satellite broadcast footprint. We offer an easy to
use format, with each gateway delivered pre-configured for the customer's
geographic location, local connection to the Internet, and connection to a local
area network. Our pricing of products and services is subject to change in
accordance with market changes and competitive conditions.
The positive factors pertaining to our competitive position include
our pricing, widespread availability, and an easy to use format. The negative
factors pertaining to our competitive position are lack of product awareness and
of brand recognition among potential customers, lack of widespread user-base,
and, in some instances, a lack of customer track record.
RESEARCH AND DEVELOPMENT
We plan to devote significant resources to continued research and
development of various Internet related products and services.
EMPLOYEES
We currently have 95 employees. 29 employees are located at our
facilities in Orange County, California, 64 employees are located in Universal
City, California, one is located in Texas and one is located in Vienna,
Austria.
DESCRIPTION OF PROPERTY
We do not own any material physical properties. We lease our
headquarters in Universal City California, as well as our other facilities in
Irvine, California and Fountain Valley, California, pursuant to commercial
leases which expire September 30, 2004, October 30, 2001 and September 30, 2003,
respectively. We also lease space in Raleigh, North Carolina, which houses our
computer equipment related to our uplink to the satellite network. We believe we
have adequate space to conduct our business for the foreseeable future.
LEGAL PROCEEDINGS
There are no material legal proceedings involving the company.
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<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of our directors
and executive officers:
<TABLE>
<CAPTION>
Officer Name Age Position Since
------------ --- -------- -----
<S> <C> <C> <C>
Michael C. Palmer 50 CEO, President, Secretary and Director 1999
Chester (Chet) L. Noblett, Jr. 55 Chairman of the Board 1997
Bruce Elbert 57 Executive Vice President and
President of Asia Operations 2000
Richard Elliot 40 Senior Vice President 2000
David Pennells 43 Senior Vice President 2000
Steven A. Tulk 33 Chief Operating Officer, PacificNet Technologies, Inc.
and InterWireless, Inc. 2000
Michael J. O'Hara 43 Senior Vice President, Managing Director -
South America Operations 2000
Leon Shpilsky 36 Senior Vice President, Managing Director -
Europe Operations 2000
Mark S. Basile 38 Chief Financial Officer 2000
Jeffrey Hecht 48 Vice President of Operations 1998
Keven Ellison 38 Vice President of Marketing 2000
Michael S. Massey 26 Chief Technology Officer 2000
Salvator A. Piraino 72 Director 1997
Gary Pan 53 Director 1998
Edward Raymund 71 Director 2000
Esther Rodriguez 58 Director 2000
James E. Fuchs 72 Director 2000
</TABLE>
The directors are elected to hold office until the next annual meeting
of stockholders and until their respective successors have been elected and
qualified. Officers are elected annually by the board of directors and hold
office until their successors are elected and qualified.
The following sets forth biographical information concerning our
directors and executive officers for at least the past five years.
MICHAEL C. PALMER has been the Chief Executive Officer, President and
Secretary and a director of the company since April 1999. Mr. Palmer held
the position of Chief Financial Officer from November 1998 to March 1999 and has
been affiliated with the company since December 1997. From 1978 through March
2000, Mr. Palmer was a partner of Parks, Palmer, Turner and Yemenedjian, a firm
of certified public accountants. Mr. Palmer served as a director of Western
Waste Industries (NYSE: WW) from July 1995 to May 1996. He received a B.S.
degree in Business Administration in 1972 and an M.S. degree in Business
Taxation in 1975 from the University of Southern California.
CHESTER (CHET) L. NOBLETT, JR. has been Chairman of the Board since
April 1999 and a Director since June 1997. He was Chief Operating Officer from
June 1997 until December 1999. He served briefly as interim Chief Financial
Officer in January and February 2000. From 1990 to 1996, Mr. Noblett was
employed as the chief executive officer for Tradom International, a
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<PAGE> 33
subsidiary of Asahi Shouian, Inc., an international food brokerage company. From
1975 to 1990, he was chief executive officer of C. Noblett & Associates, a food
brokerage company. Mr. Noblett is also president and a director of Cyber Village
Network, a computer software company. Mr. Noblett received a B.S. degree in
Business Administration from the University of Southern California in 1971.
BRUCE ELBERT became Executive President and President of Asia Operations
in July 2000. For the past 25 years, Mr. Elbert held several key management
positions in various of the Hughes Electronics and other Hughes companies. He
holds a B.S. degree in Electrical Engineering from City College of New York, an
M.S. degree in electronics engineering and computer science from the University
of Maryland and a Masters in Business Administration from Pepperdine University.
RICHARD ELLIOT became Senior Vice President of the company on May 1,
2000. From 1995 to 1999, he was President and co-founder of PacificNet, LLC, the
predecessor of PacificNet Technologies, Inc., which we acquired in April 2000.
Mr. Elliot remains the President of PacificNet Technologies, Inc. In 1998, Mr.
Elliot co-founded, and became President of, InterWireless, Inc., which we also
acquired in April 2000. He remains the President of InterWireless as well.
DAVID PENNELLS became Senior Vice President of the company on May 1,
2000. From 1995 to 1999, he was Vice President and co-founder (along with Mr.
Elliot) of PacificNet, LLC, the predecessor of PacificNet Technologies, Inc. He
remains the Vice President of PacificNet. In 1998, Mr. Pennells co-founded
(along with Mr. Elliot), and became Vice President of, InterWireless, Inc. He
remains in that position.
STEVEN A. TULK was appointed Chief Operating Officer of PacificNet
Technologies, Inc. and InterWireless, Inc. in July 2000. Prior to that he served
as the company's Senior Vice President, Managing Director - Asia Operations from
January 2000 to July 2000. Mr. Tulk served as chief information officer of
Vivendi Water's consumer and commercial division from December 1998 to January
2000. From 1994 to 1998, Mr. Tulk operated Tulk Consulting Inc., a software
development and network engineering consulting firm. From 1992 to 1994 Mr. Tulk
was director of management information systems for Pharmacia's ophthalmic
division. Mr. Tulk served as senior technical specialist for the J. Paul Getty
Trust from 1990 to 1992. Mr. Tulk received a B.S. in Business Administration
from the University of California at Riverside in 1990.
MICHAEL J. O'HARA was appointed as the company's Senior Vice President,
Managing Director - South America Operations in May 2000. Prior to that, he
served as Senior Vice President of Technology Partners from February 2000 to May
2000. Mr. O'Hara previously worked for over 15 years at Hughes in various
satellite communications and software divisions, primarily in the new business
and system engineering areas. He most recently was chief system engineer for the
Hughes-led team competing for the next-generation low-orbit U.S. weather system.
Prior to that, Mr. O'Hara served as senior systems engineer on one of the
largest data processing and distribution systems ever deployed. He has also
managed numerous multi-million dollar software development projects and
technology assessment studies. Mr. O'Hara graduated with a B.S. in Physics from
the University of Massachusetts at Lowell in 1978 and earned M.S. degrees in
Physics and Computer Science from the University of Illinois at Urbana-Champaign
in 1980 and 1984, respectively.
LEON SHPILSKY was appointed as the company's Senior Vice President,
Managing Director - Europe Operations in May 2000. From 1987 to May 2000, Mr.
Shpilsky held various positions with the certified public accounting firm of
Parks, Palmer, Turner and Yemenedjian, most recently serving as
principal/director of international practice. From 1984 to 1987, Mr. Shpilsky
was a certified public accountant with KPMG Peat Marwick, LLP, an international
accounting and consulting firm. Mr. Shpilsky received a B.S. in Business
Administration from the University of Southern California in 1984.
MARK S. BASILE was appointed as the company's Chief Financial Officer in
March 2000. From March 1999 to March 2000, Mr. Basile was chief financial
officer of Superior Galleries, Inc., an auction services firm in Beverly Hills,
California. From 1996 through March 1999, Mr. Basile served as director of
management accounting and controller of the Hawaii division of Young's Market
Company. From 1989 to 1996, Mr. Basile was director of internal audit at K2
Inc., a manufacturer of sporting goods and recreational products. Prior to that,
Mr. Basile was a certified public accountant at Ernst & Young LLP, an
international accounting and consulting firm. Mr. Basile received a B.S. in
Accounting from the University of Florida in 1983.
JEFFREY HECHT was appointed as the company's Vice President of
Operations in March 1998. From March 1997 to March 1998, Mr. Hecht was vice
president of operations for ACOM Computer Inc., a software development company
in Long Beach, California. From December 1993 to February 1997, Mr. Hecht served
as the vice president and chief information officer for Strategic Mortgage
Services, a financial services company. Mr. Hecht received a B.S. in Business
Administration from Arizona State University in 1976.
KEVEN ELLISON was appointed as the company's Vice President of
Marketing in April 2000. Mr. Ellison held the position of Director of Marketing
from July 1999 to April 2000. In 1999, Mr. Ellison developed the business plan
and web strategy for Lobbyforme.com, a leading Internet political portal.
From 1991 to 1999, Mr. Ellison was director of marketing for Loronix
Information Systems, a digital surveillance technology firm. In 1998, Mr.
Ellison provided marketing consultation services to Fargo Electronics. Mr.
Ellison provided marketing consultation services to Quicksilver Sportswear in
1990. Mr. Ellison was educated at California State University at Long Beach.
MICHAEL S. MASSEY was appointed as the company's Chief Technology
Officer in March of 2000. Since joining us in February of 1999, Mr. Massey held
the position of Director of Product Development, where he authored two patents
on satellite communication technology. From April 1998 to February 1999, Mr.
Massey was the founder and chief technical officer of Unex.Net, a satellite
communication consulting firm specializing in broadband deployment strategies in
Asia. From April 1997 to March 1998, Mr. Massey held managerial positions at
several Internet service providers, where he specialized in wide area network
(WAN) design for corporate clientele. From July 1993 to September 1996, Mr.
Massey served in the U.S. Navy, including three years in the Navy's Nuclear
Engineering Program. Mr. Massey was inducted into the Mensa Society in 1993, and
graduated cum laude from the Rose-Hulman Institute of Technology in 1995 with a
B.S. in Mechanical Engineering.
SALVATOR A. PIRAINO has been a director of the company since December
1997. From September 1992 to the present, Mr. Piraino has operated Management
and Technical Services, a management consultant firm providing management,
engineering and manufacturing expertise to a number of small companies. From
1974 to 1992, Mr. Piraino was employed as a director, program manager, product
line manager and assistant division manager for Hughes
GARY (GUO AN) PAN has been a director of the company since September
1998. From 1997 to present, Mr. Pan has served as the managing director for
United Asia Capital Partners, an investment management and financial services
firm. From 1993 to 1997, Mr. Pan served as president of Sunridge International,
Inc. and from 1992 to 1993, as senior vice president of the Great Wall Group.
Mr. Pan received a B.S. degree in Electrical Engineering from National Taiwan
University, an M.S. degree in Electrical Engineering from University of
Waterloo, and his Ph.D. in Management from the University of California at Los
Angeles.
EDWARD (ED) RAYMUND was recently appointed to fill a Board vacancy and
will be nominated for election at the upcoming annual meeting. Mr. Raymund is
founder and Chairman Emeritus of Tech Data Corp., a Fortune 500 company which
he founded in 1973. Mr. Raymund serves as a director on Tech Data's Board. He
is also chairman of the University of Southern California Supply Chain
Management Board of Directors and is a member of the Advisory Boards for
Mission Hospital Regional Medical Center and the University of Southern
California Business School. In 1997, Mr. Raymund was named in initial inductee
in Computer Reseller New's Industry Hall of Fame. Mr. Raymund holds a
Bachelor's Degree in Business Administrating with an emphasis in Finance from
the University of Southern California.
ESTHER RODRIGUEZ has been a director of the company since July
2000. From 1996 to the present, Ms. Rodriguez has served as chief executive
officer of Rodriquez Consulting Group, a consulting firm advising client
companies in the cable and satellite technologies industry. Form 1987 to 1996,
Ms. Rodriguez served in various positions at General Instrument (GI), including
vice president of worldwide business development for commercial, educational and
private networks; vice president of DBS services; and vice president and general
manager of GI's Satellite Video Center, a subsidiary which was the first to
offer satellite pay-per-view television. Ms. Rodriguez is a member of the board
of directors of both NTN Communications, Inc. and Quorum, Ltd. Ms. Rodriguez was
educated in Cuba.
JAMES E. FUCHS has been a director of the company since July 2000. Mr.
Fuchs is chairman and co-chief executive officer of the Consamer Group, Inc., a
corporation structured to utilize its marketing, sales, finance and consulting
expertise for various ventures. Mr. Fuchs is also chairman and chief executive
officer of Grenfox Group, Inc., a company involved in the development and
production of environmentally friendly inks and related coating products. Prior
to these posts, Mr. Fuchs was chairman and chief executive officer of Integrated
Human Solutions, an international human resources and consulting firm, and held
executive positions with the National Broadcasting Company, Curtis Publishing
Company, the Mutual Broadcasting Systems, Mutual Sports, Inc. and Culligan
Communications, Inc. Mr. Fuchs is a member of the board of directors of Fountain
Pharmaceuticals, Inc. and Alternate Care, Inc. Mr. Fuchs is a graduate of Yale
University.
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<PAGE> 34
Aircraft Company. Mr. Piraino received a B.E. degree in Engineering from Loyola
University in 1950.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
we paid to our Chief Executive Officer, each of the four most highly compensated
executive officers that earned more than $100,000 during 1999, and two
additional executive officers who would have been included in the four had they
been serving as executive officers in 1999.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------------- ----------------------------------------
Awards
-------------------------
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Awards Options Compensation
-------------------- ---- ---------- ------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael C. Palmer(1) 1999 $ 455,913 $ $ 87,500 1,625,000
President, Chief Executive 1998 10,780 100,000
Officer and Secretary 1997
Chester L. Noblett, Jr. 1999 178,936(2) 300,000
Chief Operating Officer 1998 114,750 48,750 1,095,802
1997
Mark McMillan(3) 1999 87,500 500,000(4)
1998
1997
James Mack(5) 1999 120,625
1998 18,750 35,000 300,000(6)
1997
</TABLE>
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<PAGE> 35
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
David Coulter*(7) 1999 51,854 50,000 1,500,000
Former President 1998 166,407 56,250 3,535,890(8)
1997
Bruce Elbert 2000 (9) 300,000
Executive Vice President,
President of Asia Operations
Richard Elliot 2000 (10)
Senior Vice President
</TABLE>
* Please see Certain transactions, below, and Note 8(e) to the Financial
Statements regarding the cancellation of Mr. Coulter's options in March,
1999.
(1) In 1999, Mr. Palmer was an employee of Parks Palmer Business Services,
a subsidiary of Century Business Services. The amount denoted as salary
includes all amounts paid to Parks Palmer Business Services through
October 1999, including payments for services other than those provided
by Mr. Palmer. Effective November 1999, the company paid Vantage
Capital, Inc. ("VCI") $25,000 per month for Mr. Palmer's services
pursuant to a consulting agreement. Mr. Palmer is the sole owner of VCI.
In addition, VCI received warrants to purchase 600,000 shares of common
stock as part of the consulting arrangement. Those warrants are not
exercisable until after December 31, 2000. See "Certain transactions"
for additional information.
(2) Includes back pay of $55,417 earned in 1999 and paid in January 2000.
(3) Mr. McMillan joined us in May 1999, with a base salary of $150,000 per
year. Additionally, he received a $250,000 mortgage loan from the
company. Mr. McMillan left the company in April 2000.
(4) All of these options were canceled in 2000 pursuant to their terms.
(5) Mr. Mack joined us in September 1998 and subsequently left in February
2000.
(6) 225,000 of these options were subsequently canceled pursuant to
their terms.
(7) Mr. Coulter left the company in May 1999. After leaving the company he
was paid $170,000 in 1999 and $90,000 in 2000. See "Certain
transactions."
(8) All of these options were subsequently canceled in 1999 pursuant to a
settlement agreement as described in "Certain transactions."
(9) Mr. Elbert joined us in July 2000, with a base salary of $175,000.
(10) Mr. Elliot joined us in April 2000, with a base salary of $180,000.
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The company has entered into an employment agreement with Mr. Noblett
for a period of five years commencing September 25, 1997. Under the agreement,
Mr. Noblett receives a salary of $130,000 per year plus health insurance
benefits of $200 per month. The employment agreement includes a cost-of-living
increase, plus any other increase which may be determined from time to time in
the discretion of our Board of Directors. In addition, Mr. Noblett is provided
with a car on lease terms determined by the company, provided that the monthly
operating costs (including lease payments) to be paid by the company will not
exceed $750.
We have entered into an employment agreement with Mr. Tulk for a period
of five years, commencing January 1, 2000. Under the terms of this agreement,
Mr. Tulk receives a minimum base salary of $150,000 per year, and is eligible to
earn a performance bonus of up to 100% of his base salary. In addition to
receiving a signing bonus of $50,000, Mr. Tulk is also entitled to reimbursement
of his relocation expenses, as well as his business-related expenses, under the
employment agreement. Further, Mr. Tulk received stock options for 350,000
shares of our stock by the terms of his stock option agreement.
The company has entered into an employment agreement with Richard Elliot
for a period of three years, commencing May 1, 2000. At the end of such term,
the agreement will automatically renew for successive one year terms unless
either party chooses not to renew the contract. By the terms of the agreement,
Mr. Elliot receives a base salary of $180,000 per year, and is eligible
to receive performance-based bonus compensation. Under the agreement, Mr.
Elliot's salary will be reviewed annually (or more frequently) by our Board of
Directors. The employment agreement includes company health insurance coverage
and reimbursement of normal business-related expenses. In addition, Mr. Elliot
is entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides an automobile allowance of $1400 per month that includes payment of
associated automobile insurance. Further, Mr. Elliot's employment agreement
allows him to be eligible to receive, together with David Pennells (see below),
an aggregate of 1,000,000 options to purchase shares of our stock for allocation
to a pool of PacificNet and InterWireless employees. 850,000 of these options
have already been allocated to certain employees of those two subsidiaries.
The company has entered into an employment agreement with David Pennells
for a period of three years, commencing May 1, 2000. The agreement will
automatically renew for successive one year periods unless either party chooses
not to renew the contract. Mr. Pennells, by the terms of the agreement, receives
a base salary of $150,000 per year, and is eligible to receive performance-based
bonus compensation. Under the agreement, Mr. Pennells' salary will be reviewed
on an annual basis (or more frequently) by our Board of Directors. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Pennells is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides an automobile allowance of $1400 per month that includes payment of
associated automobile insurance. Further, Mr.
34
<PAGE> 37
Pennells' employment agreement allows him to be eligible to receive, together
with Richard Elliot (see above), an aggregate of 1,000,000 options to purchase
shares of our stock for allocation to a pool of PacificNet and InterWireless
employees. 850,000 of these options have already been allocated to certain
employees of those two subsidiaries.
We have entered into an employment agreement with Leon Shpilsky for a
period of three years, commencing May 8, 2000. The agreement will automatically
renew for successive one year periods, provided neither party chooses not to
renew the contract. Mr. Shpilsky, by the terms of the agreement, receives a base
salary of $125,000 per year, and is eligible to receive performance-based
compensation. Under the agreement, Mr. Shpilsky may also receive a salary
adjustment under certain conditions while he is based in Western Europe. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Shpilsky is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides a monthly automobile expense allowance that includes payment of
automobile insurance and associated expenses. Further, Mr. Shpilsky is entitled
to receive compensation for relocation expenses. The employment agreement also
grants to Mr. Shpilsky 300,000 stock options for shares of our company's common
stock.
We have entered into an employment agreement with Bruce Elbert for a
period of three years, commencing July 21, 2000. The agreement will
automatically renew for successive one year periods, provided neither party
chooses not to renew the contract. Mr. Elbert, by the terms of the agreement,
receives a base salary of $175,000 per year, and is eligible to earn
performance-based compensation. The employment agreement includes company health
insurance coverage and reimbursement of normal business-related expenses. In
addition, Mr. Elbert is entitled to receive paid vacation and sick time. Under
the employment agreement, Mr. Elbert is granted 300,000 stock options for shares
of our company's common stock.
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
Individual
Grants
Percent
of Total
Options Market
Number of Granted to Exercise
Shares Employees of Base Price on Potential Realizable Value at
Underlying in Fiscal Price Date of Expiration Assumed Annual Rates of Stock
Name Options Year ($/Sh) Grant Date Price Appreciation for Option Term
---- ---------- ---------- --------- -------- ---------- ----------------------------------
5%($) 10%($)
---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael C. Palmer(1) 25,000 .6% $ 4.00 $4.00 2/9/04 $ 27,750 $ 61,000
Michael C. Palmer(1) 1,000,000 23.5 3.00 3.00 10/30/04 830,000 1,800,000
Chester L. Noblett, Jr. 300,000 7.1 3.00 3.00 2/9/04 249,000 540,000
Mark McMillan(2) 500,000 11.8 13.125 5/17/04 (3)
David Coulter(2) 1,500,000(4) 35.3 3.00 8/22/03 970,000 2,090,000
</TABLE>
(1) Excludes an aggregate of 600,000 warrants granted to VCI in 1999. VCI is
controlled by Mr. Palmer.
(2) Messrs. Coulter and McMillan have left the company.
(3) These options were canceled pursuant to their terms.
(4) Issued in the form of a warrant.
OPTIONS EXERCISED IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
Number of Shares Dollar Value
Shares Value -------------------------- --------------------------
Name Acquired Realized Exercisable Unex Exercisable Unex
---- -------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael C. Palmer - - 725,000 1,000,000 $ 137,500 $ 2,000,000
Chester L. Noblett, Jr. 159,547 $757,848 1,245,802 - 3,301,634 -
Mark McMillan(1) - - - 500,000 - -
James Mack(1) - - 100,000 200,000 200,000 400,000
</TABLE>
(1) Messrs. McMillan and Mack have left the company.
DIRECTOR COMPENSATION
Each non-employee director receives a payment of $500 for each board
meeting attended and an annual option grant to purchase 20,000 shares at market
value. All directors are entitled to reimbursement for expenses of traveling to
and from board meetings, and any other out-of-pocket expenses incurred on behalf
of the company.
Mr. Piraino, who serves as the audit committee, receives a payment of
$500 per month for his services. This compensation commenced in September, 1998.
Prior to the merger with Technology Guardian, Inc. ("TGI"), Mr. Piraino
was granted 25,000 shares of common stock as compensation for serving on the
board of directors.
35
<PAGE> 38
CERTAIN TRANSACTIONS
In April 1997, in exchange for the issuance of 849,750 shares of TGI
common stock which were converted into company shares in the merger, TGI entered
into a settlement agreement among TGI, Cyber Village Network, Inc. ("CVN") and
Mr. Noblett in which CVN and Mr. Noblett agreed to release TGI from all
potential claims arising from: (i) an Option Agreement, dated August 6, 1997;
and, (ii) an agreement entered into among TGI, David Coulter, as TGI's then
President, CVN and Mr. Noblett as agent for CVN ("Commission Agreement").
The Option Agreement granted options to CVN to purchase shares equal to
10% of TGI's issued and outstanding shares in exchange for forgiveness of a
$100,000 promissory note held by CVN, as well as the option to purchase shares
equal to 30% of TGI's issued and outstanding shares in exchange for $1,200,000.
Further, the Option Agreement provided that David Coulter, TGI's former
president, had the right to repurchase shares from CVN equal to 15% of TGI's
common stock following the exercise of the option by CVN in exchange for
$1,200,000. Mr. Coulter offset his obligation to pay CVN $1,200,000 by the
$1,200,000 payable to TGI by CVN pursuant to its exercise of options. The
Commission Agreement provided that TGI and Mr. Coulter, TGI's then President,
would pay Mr. Noblett, as agent for CVN, an amount equal to 6% of the gross
proceeds received by TGI from any underwriting arranged by Andrew Glashow and
Joe Py, including bridge financing, and subsequently, Mr. Noblett would rebate
one-third of the aforementioned fees to Mr. Coulter. The Option Agreement was
subsequently canceled and the parties released each other from all claims.
Prior to the issuance of the 1,030,000 shares of TGI's stock as a result
of the exercise of the Option Agreement by CVN and the 849,750 shares received
in consideration for the Settlement Agreement, for a total of 1,879,750 Shares,
Mr. Noblett, as agent for CVN, assigned 1,060,000 shares to certain persons as
consideration for loans made to CVN.
In March 1998 TGI completed payment to Mr. Noblett of a fee in the
amount of $100,000 for services provided in assisting TGI with obtaining
additional capital.
In May 1998 Mr. Coulter transferred 379,250 shares of his stock to CVN.
Mr. Coulter then canceled 5,414,172 shares of common stock of TGI in connection
with the pending private placement of shares of TGI. Of the shares canceled, TGI
reissued 125,619 shares to him in August 1998, prior to completion of the merger
with U.S. Connect 1995.
The cancellation of the Option Agreement was part of the overall
consideration given in settling the disputes between Mr. Noblett and Mr.
Coulter. A dispute arose between Messrs. Noblett and Coulter with regard to Mr.
Noblett's right to purchase 30% of the outstanding stock of TGI. Due to what Mr.
Coulter perceived to be the increasing potential of TGI, he did not want TGI to
honor its prior commitment to Mr. Noblett. The transactions had no impact on
the operations of the company. These transactions only resolved disputed issues
between Mr. Noblett and Mr. Coulter. At that point in time, there were fewer
than ten stockholders of the
36
<PAGE> 39
company, all of whom were closely associated with the company. Accordingly,
there were no public stockholders affected in any way by these transactions.
In connection with the merger with U.S. Connect 1995, we assumed the
obligations of TGI to issue options to purchase 2,000,000 shares of TGI common
stock on a pro rata basis to all TGI stockholders as of August 30, 1998, at an
exercise price of $0.7168 per share, exercisable for five years from date of
grant. In addition, the company assumed the obligations of TGI for options to
purchase 1,910,885 shares of TGI common stock to Mr. Coulter, then-President of
TGI, and 500,000 shares of TGI common stock to Mr. Noblett, the Vice President
and Chief Operating Officer of TGI, at an exercise price of $.7168 per share,
exercisable for five years from date of grant. In October 1998 the Board of
Directors authorized the issuance of additional options to purchase 1,500,000
shares of common stock to Mr. Coulter, and 333,000 shares of common stock to Mr.
Noblett, at an exercise price of $3.00 per share, exercisable for five years
from date of grant subject to the company achieving $30,000,000 in sales in
1999. We did not achieve this level of sales in 1999, and therefore the
additional options issued to Mr. Coulter (1,500,000) and Mr. Noblett (333,000)
lapsed.
On March 22, 1999, Mr. Coulter resigned as a director and officer of the
company. Pursuant to a resignation agreement, Mr. Coulter agreed to cancel
1,767,769 shares of common stock, reducing the number of shares he holds to
3,000,000 shares of common stock. By contract, the 3,000,000 shares retained by
Mr. Coulter are nonvoting. In addition, Mr. Coulter agreed to cancel all options
held by him to purchase 3,410,885 shares of common stock. The canceled options
included options on 1,500,000 shares exercisable at $3.00 per share and options
on 1,910,885 shares at $0.7168 per share. Mr. Coulter agreed to accept in lieu
thereof options to purchase 1,500,000 shares of common stock, with an exercise
price of $3.00 per share, for five years from August 22, 1999. Mr. Coulter also
agreed to the termination of his employment agreement. We agreed to pay Mr.
Coulter a severance payment of $150,000, payable at the rate of $30,000 per
month from the time of resignation, and to pay Mr. Coulter for consulting with
us at the rate of $10,000 per month for a total of 36 months, commencing upon
his resignation. We have entered into a general mutual release of claims with
Mr. Coulter. As a result of an alleged breach of the resignation agreement by
Mr. Coulter, we suspended the payment of $10,000 per month to Mr. Coulter. On
February 23, 2000, we entered into a settlement agreement and general release
with Mr. Coulter, pursuant to which Mr. Coulter released all claims for
compensation under the resignation agreement of March 22, 1999, and agreed to
transfer certain domain names to us. In return, we agreed to pay Mr. Coulter
$90,000 and to grant him piggy back registration rights with respect to shares
he acquires in the exercise of his stock options.
CFE and VCI (the "Consultant") worked together as equal joint venture
partners pursuant to an exclusive consulting agreement entered into between the
Consultant and the company, dated September 15, 1999, which was to terminate no
earlier than September 15, 2002. Mr. Palmer, CEO of the company, is also the
owner and President of the Consultant.
37
<PAGE> 40
Pursuant to the consulting agreement, we agreed to issue 2,500,000
shares of Series B 12% Convertible Preferred Stock to CFE for $2.00 per share,
and 1,000,000 shares of Series A 12% Convertible Preferred Stock to VCI for
$2.00 per share.
The consulting agreement and the issued and outstanding Series B
Preferred Stock was canceled by mutual agreement of the parties in March 2000.
As part of the settlement, we agreed with CFE to settle a dispute about the
number of common shares issued to CFE and its clients and the amount we received
in payment for those shares. CFE paid us $558,510 and we entered into a mutual
release with CFE for all claims. In addition, CFE agreed to put the shares of
common stock which CFE would receive upon conversion of its warrants into a
voting trust if requested by NASDAQ in order to facilitate a listing on NASDAQ.
Furthermore, all of the outstanding Series A Preferred Stock was converted into
550,000 shares of common stock in April 2000. The warrants issued to the former
holders of Series A Preferred Stock and Series B Preferred Stock remain
outstanding.
PRINCIPAL STOCKHOLDERS
COMMON STOCK
The following table sets forth, as of August 15, 2000, the ownership of
the company's common stock by
- each director and named executive officer of the company,
- all named executive officers and directors of the company as a
group, and
- all persons known by the company to beneficially own more than 5%
of the company's common stock.
<TABLE>
<CAPTION>
Amount and Percent
Nature of of Total
Beneficial Shares and
Beneficial Owner Ownership(1) Options
------------------------------------ ------------ --------------
<S> <C> <C>
David B. Coulter(2)
15555 Huntington Village Lane, #239 2,500,000 10.69%
Building 9
Huntington Beach, CA 92647
Chester (Chet) L. Noblett Jr.(3) 2,737,097 11.83%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Salvator Piraino(4) 161,103 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
</TABLE>
38
<PAGE> 41
<TABLE>
<S> <C> <C>
Gary Pan(5) 45,000 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
James E. Fuchs 2,500 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Jim Mack(6) 62,311 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Michael C. Palmer(7) 1,370,000 5.96%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Richard Elliot 2,062,500 9.43%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Steven A. Tulk 400 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Directors and Named Executive Officers 8,940,911 34.57%
as a group
</TABLE>
* Less than one percent.
(1) Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are
39
<PAGE> 42
subject to options, warrants, rights or conversion privileges
exercisable within 60 days are deemed outstanding for the purpose of
calculating the number and percentage owned by such person, but are not
deemed outstanding for the purpose of calculating the percentage owned
by each other person listed.
(2) Includes options to purchase 1,500,000 shares of the company's common
stock at $3.00 per share for a period of five years from August 22,
1998.
(3) Includes options to purchase (i) 262,802 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 8, 1998); (ii) 333,000 shares of the company's common stock at
$3.00 per share for a period of five years from date of grant (October
7, 1998); (iii) 300,000 shares of the company's common stock at $3.00
per share for a period of five years from date of grant (September 15,
1998); and (iv) warrants to purchase 350,000 shares of the company's
common stock at $2.40 per share for a period of five years from date of
grant (June 9, 1998).
(4) Includes options to purchase (i) 16,103 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998); (ii) 20,000 shares of the company's common stock at
$5.50 per share for a period of five years from date of grant (September
30, 1999); and (iii) 25,000 shares of the company's common stock at
$4.00 per share for a period of five years from date of grant (February
9, 1999).
(5) Includes options to purchase (i) 20,000 shares of the company's common
stock at $17.41 per share for a period of five years from date of grant
(September 30, 1999) and (ii) 25,000 shares of the company's common
stock at $4.00 per share for a period of five years from date of grant
(February 9, 1999).
(6) Includes options to purchase 4,294 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998).
(7) Includes options to purchase 1,000,000 shares of the company's common
stock at $3.00 per share for a period of five years from date of grant
(November 1, 1999); (ii) 100,000
40
<PAGE> 43
shares of the company's common stock at $9.25 per share for a period of
five years from date of grant (November 28, 1998); and (iii) 25,000
shares of the company's common stock at $4.00 per share for a period of
five years from date of grant (February 9, 1999).
PREFERRED STOCK
The following table sets forth information regarding the beneficial
ownership of our voting preferred stock as of the date of this prospectus:
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent
Class of Beneficial Owner Beneficially Owned of Class
----- ------------------- ------------------ --------
<S> <C> <C> <C>
Series C Wentworth, LLC 50,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
Series D Wentworth, LLC 75,000 100%
6% Convertible Preferred Corporate Center
Stock(1) West Bay Road
Grand Cayman
Series E Wentworth, LLC 30,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
</TABLE>
(1) All of the above preferred stock is convertible into common stock
immediately; provided however, that no conversion may occur if,
after conversion, the holder would be deemed beneficial owner of
more than 4.99% of the company's then outstanding common stock.
See "Description of securities" for details on the conversion
prices.
SELLING STOCKHOLDERS
All of the shares offered by this prospectus have been registered for
sale for the accounts of selling stockholders. The selling stockholders have
obtained or will obtain the common stock offered under this prospectus by
purchasing common stock from us pursuant to the Private Equity Credit Agreement
described in "Management's discussion and analysis of financial condition and
results of operations - Liquidity and capital resources," or converting or
exercising certain of our convertible securities that they now hold or have the
right to acquire. These selling stockholders hold shares of Series C 6%
Convertible Preferred Stock ("Series C Preferred"), Series D 6% Convertible
Preferred Stock ("Series D Preferred"), Series E 6% Convertible Preferred Stock
("Series E Preferred"), warrants to purchase
41
<PAGE> 44
common stock that we issued to holders of the Series C Preferred, Series D
Preferred and Series E Preferred in connection with the issuance of the Series C
Preferred, Series D Preferred, Series E Preferred, warrants we issued to an
investment banker that facilitated our sales of Series C, D and E Preferred or
common stock acquired upon the exercise of those warrants.
The table below includes, in the total number of shares offered, shares
of common stock that have been issued or are issuable pursuant to the Private
Equity Credit Agreement or upon conversion of shares of Series C Preferred,
Series D Preferred and Series E Preferred.
The table below also includes shares of common stock issuable upon
exercise of warrants issued or issuable (i) to a selling stockholder under the
Private Equity Credit Agreement, (ii) to holders (who are selling stockholders)
of Series C Preferred, Series D Preferred, and Series E Preferred, (iii) to an
investment banker which facilitated the sale of Series C, D and E Preferred and
(iv) shares of common stock acquired, or to be acquired, by a selling
stockholder pursuant to exercise of certain warrants.
We will not receive any portion of the proceeds from the sale of shares
of common stock by the selling stockholders. We have previously received
$15,500,000 from the sale of Series C, Series D and Series E Preferred shares
and may receive up to $7,000,000 from sale of common stock under the Private
Equity Credit Agreement. In addition, we may receive additional funds in a
currently indeterminable amount if outstanding warrants are exercised by the
selling stockholders.
Based on the information supplied to us by each selling stockholder, the
following table sets forth certain information regarding the approximate number
of shares of common stock which each selling stockholder owns or has the right
to immediately acquire as of the date hereof, and as adjusted to reflect the
sale by the selling stockholders of the shares of common stock offered by this
prospectus. No selling stockholder has held any office or maintained any
material relationship with us, or any of our predecessors or affiliates, over
the past three years.
<TABLE>
<CAPTION>
Common Shares Common Shares
Beneficially Owned Number of Beneficially Owned
Prior to Offering(1) Common After Offering(1)(2)
------------------------ Shares --------------------
Name and Address Number Percent Offered Number Percent
---------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Wentworth, LLC(3)
Corporate Center
West Bay Road
Grand Cayman 27,304,827(4) 55.51%(5) 27,304,827(4) -0- 0%
---------- ------ ---------- --------- ----------
Grayson & Associates(6)
One Tabor Center
1200 17th Street, 16th Floor
Golden, Colorado 80202 731,562 3.24% 731,562 -0- 0%
---------- ------ ---------- --------- ----------
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated, each
person possesses sole voting and investment power with respect to all of
the shares of common stock owned by such person, subject to community
property laws where applicable. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options and convertible securities held
by that person that are currently exercisable, or that become exercisable
within 60 days of the date of this prospectus, are deemed outstanding. Such
shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person. The information as to each
person has been furnished by such person. For purposes of this table, it is
assumed that all shares registered and offered pursuant to this prospectus
have been purchased. All such shares will be purchased or acquired pursuant
to a Private Equity Credit Agreement, upon conversion of convertible
preferred stock or exercise of warrants prior to being resold pursuant to
this prospectus.
(2) Assumes that all shares of common stock offered in this prospectus will be
sold.
42
<PAGE> 45
(3) Navigator Management Ltd., the Manager of Wentworth, LLC, has voting and
investment decision authority over this investment.
(4) In accordance with the Private Equity Credit Agreement, the terms of
the Series C, D and E Preferred Stock, and the underlying warrant
agreements with Wentworth, LLC, we are required to register an amount of
shares equal to 200% of the shares issuable with respect to such
agreements. The actual number of shares to be sold will depend on the
number of shares acquired by Wentworth, LLC pursuant to the Private
Equity Credit Agreement or upon conversion of the Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and warrants
it holds.
(5) Pursuant to the Private Equity Credit Agreement, Wentworth LLC, without
our shareholders' approval, may not acquire at any one time more than
19.9% of our outstanding common stock. Pursuant to the terms of our
Series C, D and E Preferred Stock, Wentworth LLC may not convert such
shares into our common stock if the conversion would result in its being
deemed beneficial owner of more than 4.99% of our outstanding common
stock.
(6) Gerald Grayson, President of Grayson & Associates, is the individual who
has voting and investment decision authority over this investment.
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is not intended
to be complete and is subject to and qualified in its entirety by reference to
our Amended and Restated Articles of Incorporation, copies of which are filed
as exhibits to the registration statement of which this prospectus forms a
part.
GENERAL
We have authorized capital stock consisting of 50,000,000 shares of
common stock, $0.001 par value, of which 21,882,021 common shares are issued and
outstanding (exclusive of shares reflected in this prospectus as being held for
sale by selling shareholders), and 10,000,000 shares of preferred stock, $0.001
par value, of which 155,000 shares are issued and outstanding. There are 688
holders of record of our common stock as of the date of this prospectus.
43
<PAGE> 46
As of August 14, 2000, we have reserved 7,685,211 shares of common stock
for issuance pursuant to options, and an aggregate of 33,640,162 shares for
issuance pursuant to outstanding warrants and convertible securities agreements.
We do not expect these warrants or options to be exercised in the near future
since, in most cases, the exercise price is higher than the market price for our
common stock. To be sure we have enough shares to complete this offering and
honor all exercises of warrants and options, we expect to increase our
authorized common stock from 50,000,000 shares to 100,000,000 shares in our
annual shareholders' meeting scheduled for September 15, 2000.
COMMON STOCK
The principal terms of our common stock are set forth below:
- number authorized: 50,000,000*
- number outstanding: 21,882,021 exclusive of shares reflected in
this prospectus as being held for sale by the selling
stockholders
- dividend rate: see "Dividend policy"
- vote per share: one
- no preemptive rights or other rights to subscribe for unissued or
treasury shares or securities convertible into or exercisable or
exchangeable for shares of our common stock
- shares of common stock are duly authorized and validly issued,
fully paid and nonassessable
* At the next annual meeting of shareholders, we plan to request that
shareholders authorize an increase in the authorized common stock to
100,000,000 shares
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 10,000,000
shares of preferred stock in one or more series and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by our stockholders. The issuance of preferred stock in
certain circumstances may delay, deter or prevent a change in control of the
company, may discourage bids for our common stock at a premium over the market
price of the common stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, our common stock. The principal terms
of our preferred stock are set forth below:
Series C 6% Convertible Preferred
- number authorized: 50,000 shares
- number outstanding: 50,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$5,000,000)
- vote per share: one vote for each share of common stock into
which the preferred stock could be converted as of the record
date for the vote
- right to appoint directors: none
- when convertible: all shares are convertible as of the date of
this prospectus, provided that not more than 20% of the shares
may be converted in any
44
<PAGE> 47
period of five consecutive trading days. Further, no holder may
convert into common stock if, as a result of such conversion,
that holder would own more than 19.9% of the issued and
outstanding shares of our common stock (we are required to redeem
any excess). In addition, no holder may convert Series C
Preferred Stock if, after such conversion, the holder would be
deemed a beneficial owner of more than 4.99% of the then
outstanding shares of common stock of the company
- conversion price: the lesser of 125% of the closing bid price of
the common stock on December 28, 1999 ($3.4375), or 85% of the
five date average quoted price for the five trading days
immediately preceding the conversion notice date, subject to a
$2.50 floor per share for a 15 month period ending in March 2001
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may
redeem at our election for cash at a price equal to the greater
of a) an amount sufficient to yield to holders a 17.5% annualized
rate of return or b) the economic benefit a holder would realize
(before taxes and brokerage commissions) from converting the
stock to common stock and selling it
- registration rights: the common stock into which the Series C
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
Series D 6% Convertible Preferred
- number authorized: 75,000 shares
- number outstanding: 75,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$7,500,000)
- vote per share: one vote for each share of common stock into
which the preferred stock could be converted as of the record
date for the vote
- right to appoint directors: none
- when convertible: 25,000 shares are convertible 30 days after the
effective date of this prospectus; 25,000 shares are convertible
60 days after the date of this prospectus; and the balance is
convertible 90 days after the date of this prospectus; provided
that not more than 20% of the shares may be converted in any
period of five consecutive trading days. Further, no holder may
convert into common stock if, as a result of such conversion,
that holder would own more than 19.9% of the issued and
outstanding shares of our common stock (we are required to redeem
any excess). In addition, no holder may convert Series D
Preferred Stock if, after such conversion, the holder would be
deemed a beneficial owner of more than 4.99% of the then
outstanding shares of common stock of the company
- conversion price: the lesser of 125% of the closing bid price of
the common stock on April 12, 2000 ($3.1875), or 85% of the
average price for the five trading days
45
<PAGE> 48
prior to the conversion notice date, subject to a $2.50 floor per
share for a 15 month period ending in July 2001
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may
redeem at our election for cash at a price equal to the greater
of a) an amount sufficient to yield to holders a 17.5% annualized
rate of return or b) the economic benefit a holder would realize
(before taxes and brokerage commissions) from converting the
stock to common stock and selling it
- registration rights: the common stock into which the Series D
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
Series E 6% Convertible Preferred
- number authorized: 30,000 shares
- number outstanding: 30,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$3,000,000)
- vote per share: one vote for each share of common stock into
which the preferred stock could be converted as of the record
date for the vote
- right to appoint directors: none
- when convertible: 10,000 shares are convertible 30 days after
issuance; 10,000 shares are convertible 60 days after issuance;
and the balance is convertible 90 days after issuance; provided
that not more than 20% of the shares may be converted in any
period of five consecutive trading days. Further, no holder may
convert into common stock if, as a result of such conversion,
that holder would own more than 19.9% of the issued and
outstanding shares of our common stock (we are required to redeem
any excess). In addition, no holder may convert Series E
Preferred Stock if, after such conversion, that holder would own
more than 19.9% of the issued and outstanding shares of our
common stock (we are required to redeem any excess). In addition,
no holder may convert Series E Preferred Stock if, after such
conversion, the holder would be deemed a beneficial owner of more
than 4.99% of the then outstanding shares of common stock of the
company
- conversion price: the lesser of 125% of the closing bid price of
the common stock on August 9, 2000 ($1.5234), or 85% of the
average price for the five trading days prior to the conversion
notice date
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may
redeem at our election for cash at a price equal to the greater
of a) an amount sufficient to yield to holders a 17.5% annualized
rate of return or b) the economic benefit a holder would realize
(before taxes and brokerage commissions) from converting the
stock to common stock and selling it
- registration rights: the common stock into which the Series E
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
------------
With regard to the issuance of Series C, D and E Preferred Stock, except
in certain circumstances, we have agreed not to sell additional common stock to
a third party until 120 days after the date of this prospectus.
WARRANTS TO WENTWORTH, LLC PURSUANT TO SERIES C, SERIES D AND SERIES E PREFERRED
STOCK
- number of warrants: 2,188,374
- when exercisable: at any time and from time to time; provided,
however, that in no event shall the holder be entitled to
exercise the warrant or shall the company have the obligation to
issue shares upon such exercise of all or any portion of the
warrant to the extent that, after such conversion, the sum of (i)
the number of shares of common stock beneficially owned by the
holder and its affiliates (other than shares of common stock,
which may be deemed beneficially owned through the ownership of
the unconverted portion of the preferred stock or unexercised
portion of the warrants), and (ii) the number of shares of common
stock issuable upon the conversion of the preferred stock or
exercise of the warrants with respect to which the determination
of this proviso is being made, would result in beneficial
ownership by the holder and its affiliates of more than 9.99% of
the
46
<PAGE> 49
outstanding shares of common stock (after taking into account the
shares to be issued to the holder upon such conversion or
exercise)
- exercise price: $4.617 for warrants issued with the Series C
Preferred Stock. $3.9844 for warrants issued with the Series D
Preferred Stock; and $1.5234 for warrants issued with Series E
Preferred Stock
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- registration rights: the common stock into which the Series C,
Series D and Series E warrants may be converted is required to be
registered with the Securities and Exchange Commission
ANTI-TAKEOVER LAW
Acquisition of controlling interests. A corporation is subject to
Nevada's control share law if it has more than 200 stockholders, at least 100 of
whom are stockholders of record and residents of Nevada, and it does business in
Nevada or through an affiliated corporation.
The law focuses on the acquisition of a "controlling interest" which
means the ownership of outstanding voting shares sufficient, but for the control
share law, to enable the acquiring person to exercise the following proportions
of the voting power of the corporation in the election of directors: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more. The ability to exercise such voting
power may be direct or indirect, as well as individual or in association with
others.
The effect of the control share law is that the acquiring person, and
those acting in association with it, obtains only such voting rights in the
control shares as are conferred by a resolution of the stockholders of the
corporation, approved at a special or annual meeting of stockholders. The
control share law contemplates that voting rights will be considered only once
by the other stockholders. Thus, there is no authority to strip voting rights
from the control shares of an acquiring person once those rights have been
approved. If the stockholders do not grant voting rights to the control shares
acquired by an acquiring person, those shares do not become permanent non-voting
shares. The acquiring person is free to sell its shares to others. If the buyers
of those shares themselves do not acquire a controlling interest, their shares
do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the voting power,
any stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's control share law may have the effect of discouraging takeovers
of the corporation.
Business combination law. In addition to the above control share law,
Nevada has a business combination law which prohibits certain business
combinations between Nevada corporations and "interested stockholders" for three
years after the "interested stockholder" first
47
<PAGE> 50
becomes an "interested stockholder" unless the corporation's board of directors
approves the combination in advance. For purposes of Nevada law, an "interested
stockholder" is any person who is (i) the beneficial owner, directly or
indirectly, of ten percent or more of the voting power of the outstanding voting
shares of the corporation, or (ii) an affiliate or associate of the corporation
and at any time within the three previous years was the beneficial owner,
directly or indirectly, of ten percent or more of the voting power of the then
outstanding shares of the corporation. The definition of the term "business
combination" is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquiror to use the corporation's assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other shareholders.
The effect of Nevada's business combination law is to potentially
discourage parties interested in taking control of the company from doing so if
it cannot obtain the approval of our board of directors.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Pursuant to the company's articles of incorporation, the personal
liability of a director or officer of the company to the company or a
stockholder for monetary damages for breach of a fiduciary duty is limited to
situations in which a director's or officer's acts or omissions involve
intentional misconduct, fraud or knowing violations of law.
The company's articles of incorporation and bylaws provide for the
indemnification of directors and officers of the company to the maximum extent
permitted by law. The bylaws provide generally for indemnification as to all
expenses incurred or imposed upon them as a result of actions, suits or
proceedings if they act in good faith and in a manner they reasonably believe to
be in or not opposed to the best interests of the company. These documents,
among other things, indemnify the company's employees, officers and directors
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the company, on account of services
as any employee, officer or director of the company or as an employee, officer
or director of any affiliate of the company. The company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the company as to which indemnification is
being sought, and the company is not aware of any pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.
The company has purchased directors and officers liability insurance to
defend and indemnify directors and officers who are subject to claims made
against them for their actions and omissions as directors and officers of the
company. the insurance policy provides standard directors and officers liability
insurance in the amount of $5,000,000.
48
<PAGE> 51
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons, pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
As of the August 14, 2000, assuming sale of $7,000,000 of common stock
pursuant to the Private Equity Credit Agreement at $1.0747 per share and full
conversion of our Series C, Series D and Series E Preferred Stock at the current
conversion price, and exercise of the related warrants, we will have 42,736,837
shares of common stock outstanding. Of the then outstanding shares of common
stock, 33,719,181 are freely tradable by persons other than executive officers,
directors and ten percent stockholders of the company as that term is defined
under the Securities Act, without restriction or further registration, and
7,543,995 would be deemed "restricted securities" within the meaning of Rule 144
under the Securities Act. If presently unexercised warrants or options were
exercised to purchase common stock, or presently convertible preferred stock
(other than Series C, Series D and Series E Preferred Stock) was converted into
common stock, we would have an additional 13,288,984 shares of "restricted
securities" outstanding for a total of 56,025,821 shares. "Restricted
securities" may not be sold in the absence of registration unless an exemption
from registration is available, including the exemption contained in Rule 144.
The presently outstanding "restricted securities" become eligible for resale
under Rule 144 at various dates commencing in February, 2000, and all will be
eligible for resale under Rule 144 by July, 2001.
In general, under Rule 144, a stockholder who has beneficially owned
shares of common stock for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to sale limitations, notice
requirements and the availability of current public information about us. Rule
144(k) provides that a stockholder who is not deemed to be an "affiliate" and
who has beneficially owned shares of common stock for at least two years is
entitled to sell those shares at any time under Rule 144(k) without regard to
the limitations described above. In addition to the shares of common stock that
are currently outstanding, a total of 7,685,211 shares of common stock are
reserved for issuance upon exercise of options granted to our directors,
executive officers and employees; 5,603,773 shares are issuable upon exercise of
outstanding warrants, exclusive of shares of common stock underlying warrants
registered in this prospectus; and, at current conversion prices, 11,469,617
shares are issuable upon conversion of Series C, Series D and Series E Preferred
Stock.
We are unable to estimate the number of shares that may be sold in the
future by existing holders of shares of our common stock or holders of options
or warrants or convertible securities that are outstanding or the effect, if
any, that sales of shares of common stock by these persons will have on the
market price of the common stock prevailing from time to time. Sales of
49
<PAGE> 52
substantial amounts of common stock by these persons could adversely affect the
then prevailing market prices of the common stock and warrants.
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by
selling stockholders, who consist of the persons named under "Selling
stockholders" above and those persons' pledgees, donees, transferees or other
successors in interest. The selling stockholders may sell the shares on the OTC
Bulletin Board or otherwise, at market prices or at negotiated prices. They may
sell shares by one or a combination of the following:
- a block trade in which a broker or dealer so engaged will attempt
to sell the shares as agent, but may position and resell a portion of the block
as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which a
broker solicits purchasers;
- privately negotiated transactions;
- if such a sale qualifies, in accordance with Rule 144 promulgated
under the Securities Act rather than pursuant to this prospectus; and
- any other method permitted pursuant to applicable law.
In making sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from selling stockholders in amounts to be
negotiated prior to the sale.
Wentworth, LLC is an underwriter with regard to the shares it is
offering in this prospectus. Any profits on the resale of such shares may be
deemed to be underwriting discounts and commissions.
With regard to the other shares offered hereby, the selling stockholders
and any broker-dealers that participate in the distribution may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act of
1933. Any proceeds or commissions received by them, and any profits on the
resale of shares sold by broker-dealers, may be deemed to be underwriting
discounts and commissions.
If any selling stockholder notifies us that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, we will file a prospectus supplement, if
required pursuant to Rule 424(c) under the Securities Act of 1933, setting
forth:
50
<PAGE> 53
- the name of each of the participating broker-dealers,
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable,
- a statement to the effect that the broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this prospectus, and
- any other facts material to the transaction.
We are paying the expenses incurred in connection with preparing and
filing this prospectus and the registration statement to which it relates, other
than selling commissions. In addition, in the event the selling stockholders
sell short shares of common stock issuable on conversion of our Series C, D or E
Preferred Stock, this prospectus may be delivered in connection with such short
sales and the shares offered by this prospectus may be used to cover such short
sales. To the extent, if any, that the selling stockholders may be considered
"underwriters" within the meaning of the Securities Act, the sale of the shares
by them shall be covered by this prospectus.
We have advised the selling stockholders that the anti-manipulation
rules under the Securities Exchange Act of 1934 may apply to sales of shares in
the market and to the activities of the selling stockholders and their
affiliates. In addition, we will make copies of this prospectus available to
the selling stockholders and have informed them of the need for delivery of
copies of this prospectus to purchasers at or prior to the time of any sale of
the shares offered hereby.
LEGAL MATTERS
Arter & Hadden LLP, Los Angeles, California, has advised us with respect
to the validity of the shares of common stock offered by this prospectus.
EXPERTS
Carpenter, Kuhen & Sprayberry, independent auditors, have audited the
consolidated financial statements of the company for the year ended December 31,
1999. Lichter and Associates, independent auditors, audited our consolidated
financial statements for the years ended December 31, 1997 and 1998. Their
reports are included in this prospectus. Our consolidated financial statements
are included in this prospectus in reliance on their reports, given their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The company has filed with the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1
under the Securities Act
51
<PAGE> 54
with respect to the securities offered. As permitted by SEC rules, this
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. For
further information concerning the company and the securities offered, we refer
you to the registration statement and the exhibits and schedules filed as a part
of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete. In each instance
where a copy of that contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement is qualified in all respects by reference to
that exhibit. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's Public Reference Room, at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's regional
offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and 7 World Trade Center, New York, New York
10048. Copies of all or any part of those documents may be obtained from the
SEC's office after payment of the SEC's prescribed fees. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public
reference rooms. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and will make available to stockholders quarterly reports containing
unaudited consolidated financial data for the first three quarters of each year.
We are subject to the information and reporting requirements of the Securities
Exchange Act of 1934, as amended, and file periodic reports, proxy statements
and other information with the SEC.
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<PAGE> 55
ESAT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ESAT, INC. FINANCIAL STATEMENTS
Report of Carpenter, Kuhen & Sprayberry, Independent Auditors......................... F-2
Report of Lichter and Associates, Independent Auditors................................ F-3
Consolidated Balance Sheets - December 31, 1999 and 1998 and June 30, 2000
(Unaudited)....................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997 and the six months ended June 30, 2000 and 1999 (Unaudited)......... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 and the six months ended June 30, 2000 and 1999 (Unaudited)......... F-7
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1999 and 1998 and the six months ended June 30, 2000 (Unaudited).............. F-8
Notes to Consolidated Financial Statements for the years ended December 31, 1999,
1998 and 1997 .................................................................... F-9
Notes to Consolidated Financial Statements (Unaudited) for the Six Months Ended
June 30, 2000 and 1999 .......................................................... F-34
</TABLE>
F-1
<PAGE> 56
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
AND JUNE 30, 2000 (UNAUDITED)
TOGETHER WITH INDEPENDENT AUDITOR'S REPORT
F-2
<PAGE> 57
[CARPENTER KUHEN & SPRAYBERRY LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
eSat, Inc.
Fountain Valley, California
We have audited the accompanying consolidated balance sheet of eSat, Inc., and
subsidiaries, as of December 31, 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of eSat, Inc.
as of December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern; however, the Company has
experienced losses from operations since inception, except for the reversal in
1999 of employee stock option compensation expense that was recognized in 1998
in accordance with APB 25, and substantial doubt exists as to its continuation
as a going concern. Continuation is dependent upon the success of future
operations. Management's plans in regard to those matters are described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Certain errors in applying APB 25 resulted in an understatement of previously
reported compensation expense for the year ended December 31, 1998 and was
discovered during the current year. Accordingly, the 1998 financial statements
have been restated and an adjustment has been made to compensation expense and
retained earnings to correct the error.
CARPENTER, KUHEN & SPRAYBERRY
Oxnard, California
March 29, 2000, except Note 15 as to which the date is May 10, 2000
and Note 11 as to which the date is August 9, 2000
F-3
<PAGE> 58
[LICHTER, WEIL & ASSOCIATES LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
eSat, Inc. (Formerly Technology Guardian, Inc.)
Fountain Valley, California
We previously audited and reported on the consolidated statements of income and
cash flows of eSat, Inc. and subsidiaries for the years ended December 31, 1998
and 1997, prior to their restatement for the 2000 pooling of interests and
issued our opinion thereon dated February 23, 1999. The contribution of eSat,
Inc. and subsidiaries to revenues and net income represented 14 percent and 99
percent of the respective restated totals for 1998 and 42 percent and 80 percent
of the respective restated totals for 1997. Separate financial statements of the
other companies included in the 1998 and 1997 restated consolidated statements
of income and cash flows were audited and reported on separately by other
auditors. We also audited the combination of the accompanying consolidated
statements of income and cash flows for the year ended December 31, 1998 and
1997, after restatement for the 2000 pooling of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Note 1 of the restated notes to consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
LICHTER, WEIL & ASSOCIATES
February 23, 1999
Los Angeles, California
F-4
<PAGE> 59
eSAT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1999 and 1998
AND JUNE 30, 2000 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1998 2000
---------- ---------- ----------
(RESTATED) (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $3,412,205 $2,703,516 $ 667,375
Accounts receivable, net 471,899 120,900 616,589
Inventory, net 135,189 289,260 349,943
Other current assets 17,866 8,786 14,821
Deposits 420,747 -- 273,279
Note receivable-related party 64,553 18,515 2,563
---------- ---------- ----------
Total current assets 4,522,459 3,140,977 1,924,570
---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET 1,051,936 753,833 1,951,511
---------- ---------- ----------
OTHER ASSETS:
Notes receivable 250,000 15,000 110,812
Notes receivable-related party -- -- 646,512
Goodwill, net -- -- 4,003,925
Deposits 132,523 16,746 80,336
Other assets 23,907 47,215 15,170
---------- ---------- ----------
Total other assets 406,430 78,961 4,856,755
---------- ---------- ----------
$5,980,825 $3,973,771 $8,732,836
========== ========== ==========
</TABLE>
F-5
<PAGE> 60
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1999 1998 2000
------------ ------------- ------------
(RESTATED)
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable-trade $ 837,065 $ 530,810 $ 1,912,431
Accounts payable-other -- -- 428,516
Accrued expenses 199,955 214,326 63,218
Unearned revenue 306,732 117,070 151,883
Deferred revenue 73,646 72,134 211,562
Other current liabilities -- 6,414 191,429
Current portion of obligations under capital lease 76,049 23,094 --
Contracts payable 76,973 22,710 37,418
Net assets held for disposal 284,419 -- 2,435,870
Note payable stockholder -- -- 34,700
Severance pay payable 90,000 -- --
Commission payable 160,000 -- --
Current portion of long-term debt 250,346 95,712 66,672
Settlement payable 83,866 -- --
Note payable related party 90,250 -- --
------------ ------------ ------------
Total current liabilities 2,529,301 1,082,270 5,533,699
------------ ------------ ------------
LONG-TERM LIABILITIES
Obligations under capital lease 130,395 18,160 69,580
Long-term debt -- 250,348 --
Deferred revenue 22,455 -- 94,050
------------ ------------ ------------
Total long-term liabilities 152,850 268,508 163,630
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C, cumulative, fully participating,
convertible, $0.01 par value Authorized - 50,000 shares,
Issued and outstanding - 50,000 shares (Aggregate liquidation
preference $4,999,500 in 1999) 500 -- 500
Preferred stock - Series A, cumulative, fully participating,
convertible, $0.01 par value Authorized - 2,000,000 shares,
Issued and outstanding - 1,000,000 shares (Aggregate liquidation
preference $1,990,000 in 1999) 10,000 -- --
Preferred stock - Series D, cumulative, fully participating,
convertible, $0.001 par value Authorized - 75,000 shares,
Issued and outstanding - 75,000 shares (Aggregate liquidation
preference $7,499,925 in 2000) -- -- 75
Common stock - $0.001 par value Authorized - 50,000 shares Issued
and outstanding 21,095,214 shares at December 31, 1999 21,095 18,836 21,721
Additional paid-in capital 25,762,197 96,802,499 25,862,006
Retained deficit (20,936,608) (94,198,342) (22,848,795)
------------ ------------ ------------
4,857,184 2,622,993 3,035,507
Less: Subscriptions receivable (1,558,510) -- --
------------ ------------ ------------
Total stockholders' equity 3,298,674 2,622,993 3,035,507
------------ ------------ ------------
$ 5,980,825 $ 3,973,771 $ 8,732,836
============ ============ ============
</TABLE>
F-6
<PAGE> 61
eSat, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
(RESTATED)
<S> <C> <C> <C>
SALES $ 3,676,217 $ 2,474,617 $ 2,872,547
COST OF SALES 3,598,786 2,656,090 1,672,489
------------ ------------ ------------
Gross Margin 77,431 (181,473) 1,200,058
GENERAL AND ADMINISTRATIVE EXPENSES 8,162,188 2,942,041 1,491,707
------------ ------------ ------------
Loss from operations (8,084,757) (3,123,514) (291,649)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Compensation adjustment recognized under APB 25 81,945,112 (90,754,014) --
Other income 165,684 15,000 --
Interest income 57,170 -- 56
Gain (loss) on sale of assets (122,368) (24,286) (12,294)
Interest expenses (68,192) (27,009) (30,118)
Worthless stock -- -- --
------------ ------------ ------------
81,977,406 (90,790,309) (42,356)
------------ ------------ ------------
Income (loss) before income taxes, discontinued
operations, and extraordinary income 73,892,649 (93,913,823) (334,005)
PROVISION FOR INCOME TAX 5,400 4,600 4,155
------------ ------------ ------------
Income (loss) before discontinued operations
and extraordinary item 73,887,249 (93,918,423) (338,160)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued subsidiary (less
applicable income taxes of $-0-) (448,597) -- --
Loss on disposal of discontinued subsidiary, including
provision of $967,050 for operating losses during the phase
out period (less applicable taxes of $-0-) -- -- --
------------ ------------ ------------
(448,597) -- --
------------ ------------ ------------
Income (loss) before extraordinary item 73,438,652 (93,918,423) (338,160)
EXTRAORDINARY INCOME -- 242,990 --
------------ ------------ ------------
Net income (loss) $ 73,438,652 $(93,675,433) $ (338,160)
============ ============ ============
EARNINGS PER COMMON SHARE:
Income (loss) before discontinued operations and
extraordinary income $ 3.53 $ (4.99) $ (0.02)
============ ============ ============
Discontinued operations $ (0.02) $ -- $ --
============ ============ ============
Extraordinary income $ -- $ 0.01 $ --
============ ============ ============
Net income (loss) $ 3.50 $ (4.97) $ (0.02)
============ ============ ============
EARNINGS PER COMMON SHARE--ASSUMING DILUTION
Income (loss) before discontinued operations and
extraordinary income $ 2.79 $ (4.99) $ (0.02)
============ ============ ============
Discontinued operations $ (0.02) $ -- $ --
============ ============ ============
Extraordinary income $ -- $ 0.01 $ --
============ ============ ============
Net income (loss) $ 2.77 $ (4.97) $ (0.02)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SALES $ 2,396,203 $ 1,824,167
COST OF SALES 2,461,642 1,925,678
------------ ------------
Gross Margin (65,439) (101,511)
GENERAL AND ADMINISTRATIVE EXPENSES 6,458,138 3,784,543
------------ ------------
Loss from operations (6,523,577) (3,886,054)
------------ ------------
OTHER INCOME (EXPENSE):
Compensation adjustment recognized under APB 25 6,930,672 67,876,429
Other income 8,004 24,600
Interest income 28,279 52,346
Gain (loss) on sale of assets 25,000 (130,569)
Interest expenses (31,021) (24,804)
Worthless stock -- (2,000)
------------ ------------
6,960,934 67,796,002
Income (loss) before income taxes, discontinued
operations, and extraordinary income 437,357 63,909,948
PROVISION FOR INCOME TAX -- 5,400
------------ ------------
Income (loss) before discontinued operations
and extraordinary item 437,357 63,904,548
------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued operations (less
applicable income taxes of $-0-) (1,184,404) --
Loss on disposal of discontinued operations, including
provision of $967,050 for operating losses during the phase
out period (less applicable taxes of $-0-) (967,050) --
------------ ------------
(2,151,454) --
------------ ------------
Income (loss) before extraordinary item (1,714,097) 63,904,548
EXTRAORDINARY INCOME -- --
------------ ------------
Net income (loss) $ (1,714,097) $ 63,904,548
============ ============
EARNINGS PER COMMON SHARE:
Income (loss) before discontinued operations and
extraordinary income $ 0.02 $ 3.01
============ ============
Discontinued operations $ (0.10) $ --
============ ============
Extraordinary income $ -- $ --
============ ============
Net income (loss) $ (0.08) $ 3.01
============ ============
EARNINGS PER COMMON SHARE--ASSUMING DILUTION
Income (loss) before discontinued operations and
extraordinary income $ 0.02 $ 2.33
============ ============
Discontinued operations $ (0.10) $ --
============ ============
Extraordinary income $ -- $ --
============ ============
Net income (loss) $ (0.08) $ 2.33
============ ============
</TABLE>
F-7
<PAGE> 62
eSat Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 73,438,652 $(93,675,433) $ (338,160)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
in operating activities -
Noncash items included in net income:
Depreciation and amortization 338,044 154,420 121,572
Gain on sale of fixed assets (675) -- --
Loss on disposal of assets 123,043 24,286 12,294
Loss on worthless stock 2,000 -- --
Allowance for doubtful notes -- -- --
Employee relocation expenses offset by
note receivable reduction -- -- --
Compensation - stock issued for services 1,162,477 -- --
Compensation - stock options issued for services -- -- --
Compensation adjustment recognized under APB 25 (81,945,112) 90,754,013 --
Loss on equity investment in discontinued operations 448,597 -- --
Net change in operating assets and liabilities 201,997 66,249 206,946
------------ ------------ ------------
Net cash provided by (used in)
operating activities (6,230,977) (2,676,465) 2,652
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in amount due from related party (48,414) (18,113) --
Decrease (increase) in amount due from members 2,376 (2,376) --
Payments for purchase of fixed assets (582,545) (376,312) (167,908)
Proceeds from sale of fixed assets 70,280 -- --
Proceeds from subscription receivable -- -- --
Investment in discontinued operations (164,178) -- --
Increase in notes receivable (235,000) -- --
Purchase of subsidiary -- -- --
Purchase of stock -- (2,000) (12,000)
------------ ------------ ------------
Net cash used in investing activities (957,481) (398,801) (179,908)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in contracts payable 54,263 22,710 --
Payments of contracts payable -- -- --
Payments of lease obligations (33,777) (12,044) --
Issuance of long-term debt -- 269,049 --
Payments of long-term debt (95,713) -- (391)
Member distributions (176,918) (78,500) (87,500)
Preferred stock dividend -- -- --
Payments on notes payable (47,283) -- (61,378)
Proceeds from issuance of preferred stock 5,475,000 -- --
Proceeds from issuance of common stock 2,721,575 5,673,132 253,363
------------ ------------ ------------
Net cash provided by financing activities 7,897,147 5,874,347 104,094
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH 708,689 2,799,081 (73,162)
EQUIVALENTS
CASH (OVERDRAFT) AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,703,516 (95,565) (22,403)
------------ ------------ ------------
CASH (OVERDRAFT) AND CASH EQUIVALENTS, END OF YEAR $ 3,412,205 $ 2,703,516 $ (95,565)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,714,097) $ 63,904,550
Adjustments to reconcile net income (loss)
to net cash used in operating activities
in operating activities -
Noncash items included in net income:
Depreciation and amortization 386,017 139,596
Gain on sale of fixed assets (25,000) 130,569
Loss on disposal of assets -- --
Loss on worthless stock -- 2,000
Allowance for doubtful notes 178,932 --
Employee relocation expenses offset by
note receivable reduction 117,000 --
Compensation - stock issued for services -- 107,500
Compensation - stock options issued for services 919,249 --
Compensation adjustment recognized under APB 25 (6,930,672) (67,876,429)
Loss on equity investment in discontinued operations 2,151,454 --
Net change in operating assets and liabilities 860,184 524,370
------------ ------------
Net cash provided by (used in)
operating activities (4,056,933) (3,067,844)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in amount due from related party (767,022) (241,624)
Decrease (increase) in amount due from members -- --
Payments for purchase of fixed assets (676,158) (331,686)
Proceeds from sale of fixed assets -- 28,280
Proceeds from subscription receivable 558,510 --
Investment in discontinued operations (539) --
Increase in notes receivable -- --
Purchase of subsidiary (4,108,553) --
Purchase of stock -- --
------------ ------------
Net cash used in investing activities (4,993,762) (545,030)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in contracts payable -- 30,277
Payments of contracts payable (39,555) --
Payments of lease obligations (33,133) (12,110)
Issuance of long-term debt -- --
Payments of long-term debt (250,347) (61,397)
Member distributions (111,423) (65,226)
Preferred stock dividend (86,667) --
Payments on notes payable (66,235) --
Proceeds from issuance of preferred stock 6,893,225 --
Proceeds from issuance of common stock -- 1,721,411
------------ ------------
Net cash provided by financing activities 6,305,865 1,612,955
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH (2,744,830) (1,999,919)
EQUIVALENTS
CASH (OVERDRAFT) AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,412,205 2,703,516
------------ ------------
CASH (OVERDRAFT) AND CASH EQUIVALENTS, END OF YEAR $ 667,375 $ 703,597
============ ============
</TABLE>
F-8
<PAGE> 63
eSAT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Preferred Stock-Series A Preferred Stock-Series C Preferred Stock-Series D
--------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 -- $ -- -- $ -- -- $ --
Adjustment in connection with
pooling of interests -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997, restated -- -- -- -- -- --
Net loss -- -- -- -- -- --
Member distributions -- --
Common stock issued in
reverse acquisition -- -- -- -- -- --
Sale of common stock -- -- -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 -- -- -- -- -- --
Net income -- -- -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- -- -- --
Member distributions -- --
Sale of common stock -- -- -- -- -- --
Issuance of common
stock for services -- -- -- -- -- --
Sale of preferred stock series A 1,000,000 10,000 -- -- -- --
Sale of preferred stock series C -- -- 50,000 500 -- --
Cancellation of common
stock in settlement -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 1,000,000 10,000 50,000 500 -- --
Net income -- -- -- -- -- --
Compensation adjustment
recognized under FAS 123 -- -- -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- -- -- --
Issuance of common stock
related to raising capital -- -- -- -- -- --
Stock accepted for payment of note -- -- -- -- -- --
Issuance of common stock related
to acquisition expenses -- -- -- -- -- --
Sale of preferred stock
series D, net of expenses -- -- -- -- 75,000 75
Conversion of series A
preferred stock (1,000,000) (10,000) -- -- -- --
Acquisition expenses -- -- -- -- -- --
Cashless exercise of
common stock options -- -- -- -- -- --
Cashless exercise of
common stock warrants -- -- -- -- -- --
Reversal of payable related
to cost of capital -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- --
Member distributions -- -- -- -- -- --
Cancellation of shares -- -- -- -- -- --
Payment of subscription -- -- -- -- -- --
Elimination of subscription receivable -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 2000 -- $ -- 50,000 $ 500 75,000 $ 75
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Minority
--------------------------- Paid-In Retained Subscription Interest in
Shares Amount Capital Deficit Receivable Subsidiary
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 11,407,507 $ 11,408 $ 278,643 $ (617,804) $ -- $ --
Adjustment in connection with
pooling of interests 2,750,000 2,750 (2,750) 173,395 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997, restated 14,157,507 14,158 275,893 (444,409) -- --
Net loss -- -- -- (93,675,433) -- --
Member distributions (78,500)
Common stock issued in
reverse acquisition 1,050,400 1,050 103,089 -- -- --
Sale of common stock 3,628,029 3,628 5,669,503 -- -- --
Compensation adjustment
recognized under APB 25 -- -- 90,754,014 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 18,835,936 18,836 96,802,499 (94,198,342) -- --
Net income -- -- -- 73,438,652 -- --
Compensation adjustment
recognized under APB 25 -- -- (81,945,112) -- -- --
Member distributions (176,918)
Sale of common stock 3,848,577 3,848 3,278,365 -- (558,510) --
Issuance of common
stock for services 178,470 179 1,161,945 -- -- --
Sale of preferred stock series A -- -- 1,990,000 -- (1,000,000) --
Sale of preferred stock series C -- -- 4,474,500 -- -- --
Cancellation of common
stock in settlement (1,767,769) (1,768) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 21,095,214 21,095 25,762,197 (20,936,608) (1,558,510) --
Net income -- -- -- (1,714,097) -- --
Compensation adjustment
recognized under FAS 123 -- -- 919,249 -- -- --
Compensation adjustment
recognized under APB 25 -- -- (6,930,672) -- -- --
Issuance of common stock
related to raising capital 50,000 50 (50) -- -- --
Stock accepted for payment of note (24,988) (25) (50,731) -- -- --
Issuance of common stock related
to acquisition expenses 45,833 46 146,047 -- -- --
Sale of preferred stock
series D, net of expenses -- -- 6,984,925 -- -- --
Conversion of series A
preferred stock 550,000 550 9,450 -- -- --
Acquisition expenses -- -- (238,404) -- -- --
Cashless exercise of
common stock options 75,642 76 (76) -- -- --
Cashless exercise of
common stock warrants 36,509 36 (36) -- -- --
Reversal of payable related
to cost of capital -- -- 160,000 -- -- --
Payment of preferred stock dividends -- -- -- (86,667) -- --
Member distributions -- -- -- (111,423) -- --
Cancellation of shares (106,757) (107) 107 -- -- --
Payment of subscription -- -- -- -- 558,510 --
Elimination of subscription receivable -- -- (900,000) -- 1,000,000 --
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 2000 21,721,453 $ 21,721 $ 25,862,006 $(22,848,795) $ -- $ --
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
------------
<S> <C>
Balance, December 31, 1997 $ (327,753)
Adjustment in connection with
pooling of interests 173,395
------------
Balance, December 31, 1997, restated (154,358)
Net loss (93,675,433)
Member distributions (78,500)
Common stock issued in
reverse acquisition 104,139
Sale of common stock 5,673,131
Compensation adjustment
recognized under APB 25 90,754,014
------------
Balance, December 31, 1998 2,622,993
Net income 73,438,652
Compensation adjustment
recognized under APB 25 (81,945,112)
Member distributions (176,918)
Sale of common stock 2,723,703
Issuance of common
stock for services 1,162,124
Sale of preferred stock series A 1,000,000
Sale of preferred stock series C 4,475,000
Cancellation of common
stock in settlement (1,768)
------------
Balance, December 31, 1999 3,298,674
Net income (1,714,097)
Compensation adjustment
recognized under FAS 123 919,249
Compensation adjustment
recognized under APB 25 (6,930,672)
Issuance of common stock
related to raising capital --
Stock accepted for payment of note (50,756)
Issuance of common stock related
to acquisition expenses 146,093
Sale of preferred stock
series D, net of expenses 6,985,000
Conversion of series A
preferred stock --
Acquisition expenses (238,404)
Cashless exercise of
common stock options --
Cashless exercise of
common stock warrants --
Reversal of payable related
to cost of capital 160,000
Payment of preferred stock dividends (86,667)
Member distributions (111,423)
Cancellation of shares --
Payment of subscription 558,510
Elimination of subscription receivable 100,000
------------
Balance June 30, 2000 $ 3,035,507
============
</TABLE>
F-9
<PAGE> 64
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of eSat, Inc. and subsidiaries is
presented to assist in understanding the Company's financial statements.
These accounting policies conform to generally accepted accounting
principles.
eSat, Inc. ("the Company"), was originally incorporated under the laws
of the State of California on February 22, 1996 as Technology Guardian,
Inc. On October 8, 1998, the Company merged with U.S. Connect 1995,
Inc., and on January 26, 1999, changed its name to eSat, Inc.
a) Nature of Operations
The Company's provides high-speed satellite Internet access
services and products to businesses, educational institutions,
and government agencies, both domestically and internationally.
The Company's satellite network enables it to provide high-speed
data delivery services without geographical constraints. The
Company is also developing a personal interactive desktop
organizer, which includes a variety of personal productivity
programs.
The Company also provides a wide range of services under the
product name VISP or Virtual Internet Service Provider. The VISP
product is geared to companies who currently or wish to offer ISP
services without the burden of investing in and maintaining a
"back office" portion of an ISP business. The VISP product is
completely customized to meet the customers' branding
requirements and is operate by the Company in its network
operations center. Services include user signup, billing,
authentication, email, news, technical support and access to more
than 1,100 dialup locations throughout the world.
b) Revenue Recognition
The Company reports on the accrual basis for both financial
statement and income tax purposes. Revenue from product sales is
recognized as products are shipped. Deferred revenue consists of
prepaid Internet access fees, prepaid VISP contract services and
deferred start up fees. Start up fee revenue is amortized using
the straight-line method over the estimated life of the contract.
A related liability, deferred revenue is recorded for the
unearned portion of service revenue received.
F-10
<PAGE> 65
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c) Business Combination
On April 13, 2000, the Company acquired PacificNet Technologies,
Inc. in a business combination accounted for as a pooling of
interests. PacificNet Technologies, Inc. became a wholly owned
subsidiary of the Company through the exchange of 2,750,000
shares of the Company's common stock for all of the outstanding
stock of PacificNet Technologies, Inc. The accompanying financial
statements for the years ended December 31, 1999, 1998 and 1997
have been restated to give effect to the combination.
Following is a reconciliation of the amounts of net sales and net
income previously reported with restated amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Sales:
As previously
reported $ 313,640 $ 341,047 $ 1,201,044
Acquired company 3,362,577 2,133,570 1,671,503
------------ ------------ ------------
As restated $ 3,676,217 $ 2,474,617 $ 2,872,547
============ ============ ============
Net income (loss)
As previously
reported $ 73,199,403 $(93,481,186) $ (453,798)
Acquired company 239,249 (194,247) 115,638
------------ ------------ ------------
As restated $ 73,438,652 $(93,675,433) $ (338,160)
============ ============ ============
</TABLE>
d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-11
<PAGE> 66
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Cash and Cash Equivalents
The Company considers all investment instruments purchased with a
maturity of three months or less to be cash equivalents.
f) Concentration of Credit Risk
The Company maintains its cash balances in various financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At various times throughout
the year ended December 31, 1999, the Company has maintained
balances in excess of federally insured limits. The Company's
uninsured balances totaled $3,260,611 and $221,058 at December
31, 1999 and 1998, respectively.
Beginning in 1999 the Company has a VISP service contract with a
nationwide Internet service provider to provide for its program
participants dial-up authentication, email and billing. The
Company receives a fee per program participant per month on a
prorated basis, taking into account deactivations and
cancellations of participants. The service contract has a
three-year term ending March 31, 2002 with an automatic renewal
clause and is to continue indefinitely until the agreement is
terminated by either party. This major customer comprised 43
percent of accounts receivable at December 31, 1999 and 26
percent of sales for the year ended December 31, 1999.
The Company purchases transponder time from one supplier.
g) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are
charged off against the allowance when management believes that
the collectibility of the account is unlikely. Recoveries of
amounts previously charged off are credited to revenues. At
December 31, 1999 and 1998, the allowance for doubtful accounts
was $154,238 and $45,882, respectively.
h) Inventory
Inventory consists of satellite dishes and related equipment and
is stated at the lower of cost or market. Cost is determined
using the weighted average method.
F-12
<PAGE> 67
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Property, Equipment and Depreciation
Property and equipment are recorded at cost. Depreciation of
property and equipment is provided using the straight-line method
over the following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Computer equipment 3-5 Years
Furniture 5 Years
Leasehold improvements 3 Years
Office equipment 3-7 Years
Software 3 Years
</TABLE>
Expenditures for maintenance and repairs are charged to expense
as incurred.
Property and equipment consist of:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computer equipment $ 790,065 $ 734,691
Office equipment 253,888 139,905
Furniture 103,269 99,173
Leasehold improvement 35,440 24,018
Software 14,030 --
Automobiles -- 19,325
----------- -----------
1,196,692 1,017,112
Less - Accumulated depreciation (376,807) (309,227)
----------- -----------
819,885 707,885
Leased property under capital lease, net 232,051 45,948
----------- -----------
$ 1,051,936 $ 753,833
=========== ===========
</TABLE>
F-13
<PAGE> 68
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) Principles of Consolidation
The consolidated financial statements include the accounts of
eSat, Inc., and its wholly owned subsidiaries. Significant
inter-company transactions and amounts have been eliminated in
consolidation.
k) Research and Development
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts
charged to operations for the years ended December 31, 1999 and
1998 were $500,134 and $2,580. For the year ended December 31,
1997 there was no expenditure for research and development.
The Company accounts for the creation of its computer software
products in accordance with SFAS 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed.
Accordingly, where technological feasibility has been established
but the software product has not yet been made available for
general release to customers, production costs incurred have been
capitalized in the financial statement. The unamortized portion
of the capitalized costs at December 31, 1999 was $96,451.
l) Income Taxes
The Company files a consolidated federal income tax return. The
subsidiaries pay to or receive from eSat, Inc., the parent
company, the amount of federal income taxes they would have paid
or received had the subsidiaries filed separate federal income
tax returns.
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for
income taxes. The Company has a deferred tax asset due to net
operating loss carryforwards for income tax purposes and the
non-tax deductible recognition of compensation expense for
financial statement purposes. The deferred tax asset is
$2,754,236 and $808,290 at December 31, 1999 and 1998,
respectively; however, due to the ongoing nature of the losses
and the potential inability of the Company to ever realize the
benefit, a valuation allowance has been established for 100% of
the deferred tax asset. At December 31, 1999 and 1998, the
Company's available federal net operating loss carry forwards
totaled $12,233,782 and $3,589,974, respectively, and California
net operating loss carry forwards totaled $12,232,752 and
$3,590,544, respectively. The loss carry forwards will expire at
various dates through the year 2019.
F-14
<PAGE> 69
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l) Income Taxes (Continued)
Prior to the pooling of interests on April 13, 2000, PacificNet
operated as a limited liability company. They were treated as a
partnership for federal income tax purposes. Consequently,
federal income taxes are not payable by, or provided for, the
Company. Members are taxed individually on their shares of the
Company's earnings at the federal and state levels. The Company
was subject to an annual California minimum franchise tax of $800
and the California Limited Liability Company Fee, which is based
on annual gross sales. The Company's net income or loss is
allocated among the members in accordance with the operating
agreement of the Company.
m) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25,
Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation cost is recognized on
fixed plans over the vesting period based on the difference, if
any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
For variable plans, APB 25 requires recognition of compensation
cost over the vesting period based on the difference, if any, on
the period-end date between the fair value of the Company's stock
and the amount an employee must pay to acquire the stock.
Forfeitures of variable plan options result in a reversal of
previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the
exercise price of those options and the fair value of the
Company's stock at December 31, 1998, the Company recognized a
substantial amount of non-cash compensation cost in 1998.
Subsequently, a large number of forfeitures and the re-pricing to
market of those options in 1999 caused a considerable reversal of
the previously recognized non-cash compensation cost. The
resulting net income for the year ended December 31, 1999, should
not be construed as profitable operations during that year (See
Note 2 for Going Concern disclosure).
F-15
<PAGE> 70
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
n) Net Earnings or Loss Per Share
The following data show the amounts used in computing earnings
per share and the effect on income and the weighted average
number of shares of dilutive potential common stock:
<TABLE>
<CAPTION>
<S> <C>
Income available to common stockholders before adjustments $ 73,438,652
Adjustments --
------------
Income available to common stockholders used in basic EPS $ 73,438,652
============
Weighted average number of common shares used in
basic EPS 20,956,553
Effect of dilutive securities:
Common stock dividend on preferred stock Series A (479)
Stock options 3,190,364
Warrants 2,288,753
Convertible preferred stock Series A 53,730
Convertible preferred stock Series C 16,438
------------
Weighted average number of common shares and dilutive
potential common stock used in dilutive EPS 26,505,359
============
</TABLE>
The following transactions occurred after December 31, 1999,
which, had they taken place during 1999, would have changed the
number of shares used in the computations of earnings per share:
(1) options to purchase 680,000 common shares were issued to
employees; (2) warrants to purchase 2 million common shares were
awarded to non-employees; and (3) a third party investor agreed
to purchase 6 million common shares and warrants to purchase an
additional 6 million shares on March 16, 2000 (See Note 11).
Basic net loss per share is based on the weighted average number
of common shares outstanding of 18,835,936 and 14,157,507 for
1998 and 1997, respectively. The basic and diluted earnings per
share calculations are the same for 1998 and 1997 because
potential dilutive securities would have had an antidilutive
effect for all periods presented. Securities that were not
included in the 1998 and 1997 earnings per share calculation
because they were antidilutive consist of the convertible
preferred stock, warrants and stock options.
F-16
<PAGE> 71
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
o) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 1999, 1998,
and 1997 were $485,792, $181,624, and $127,491, respectively.
(2) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern; however, the
Company has sustained substantial operating losses in recent years. In
view of this matter, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet
its financing requirements, and the success of its future operations.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity
for the Company to continue as a going concern. In March 2000, the
Company entered into a private placement agreement for the sale of
$12,000,000 of common stock. The Company feels that this and subsequent
financing arrangements coupled with product and services market
introductions will provide sufficient cash to meet its operating and
business expansion requirements in 2000.
(3) NOTE RECEIVABLE - EMPLOYEE
Note receivable - employee consists of a note receivable from an
employee dated June 9, 2000, due in monthly payments of $1,580,
including interest at 6.5%, secured by personal property of the
employee, matures June 9, 2030.
(4) LEASED PROPERTY UNDER CAPITAL LEASE
The Company leases office equipment under capital leases. The economic
substance of these lease agreements is that the Company is financing the
acquisition of the leased assets through the leases and, accordingly,
they are recorded in the Company's assets and liabilities. The following
is an analysis of the leased property under capital lease
F-17
<PAGE> 72
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(4) LEASED PROPERTY UNDER CAPITAL LEASE (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computer equipment $ 159,579 $ 49,058
Office equipment 137,081 --
Less accumulated depreciation (64,609) (3,110)
--------- ---------
$ 232,051 $ 45,948
========= =========
Net minimum lease payments $ 245,949 $ 48,195
Less - amount representing interest (39,505) (6,941)
--------- ---------
Present value of net minimum lease payments $ 206,444 $ 41,254
========= =========
</TABLE>
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<CAPTION>
<S> <C> <C>
Years ending December 31, 2000 $ 81,906
2001 74,977
2002 40,140
2003 9,421
----------
$ 206,444
==========
</TABLE>
F-18
<PAGE> 73
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
a) Non-Cancelable Operating Lease
Beginning in 1999 the Company leases its headquarters office
facilities under a non-cancelable operating lease. The lease has
a 65-month term, which expires September 1, 2004. At December 31,
1999, base rent under the lease was $26,313 per month. Base rent
escalates each year. Rent expense for the year ended December 31,
1999 was $257,034. There is no renewal option on this lease.
The Company leases its Fountain Valley office facilities under a
non-cancelable operating lease. The lease has a five-year term,
which expires September 30, 2003. At December 31, 1999, base rent
under the lease was $7,332 per month. The lease requires the
Company to provide for common area maintenance expenditures. Base
rent and CAM charges are subject to escalation every year. The
Company has the option to renew the lease for an additional
period of five years. Rent expense under the lease for the years
ended December 31, 1999, 1998, and 1997 were $86,013, $45,500,
and $25,900, respectively.
The Company leases computer equipment under non-cancelable
operating leases. The lease terms range from 20 months to 60
months and expire from October 31, 2000 to May 31, 2004. At
December 31, 1999 base rent under the lease agreements ranged
from $400 to $3,643 per month. Rent expense for the years ended
December 31, 1999 and 1998 was $196,336 and $255,020,
respectively. Certain operating leases provide for renewal
options for one year periods at their fair rental value at the
time of renewal. In the normal course of business, operating
leases are generally renewed or replaced by other leases.
The Company leases office equipment under a non-cancelable
operating lease. The lease has a 60 month term, which expires
November 30, 2001. At December 31, 1999 base rent under the lease
was $405.94 per month. Rent expense for the years ended December
31, 1999 and 1998 was $4,871. There is no renewal option on this
lease.
The following is a schedule by years of future minimum lease
payments required under the lease:
<TABLE>
<CAPTION>
<S> <C> <C>
Years ending December 31, 2000 $ 593,302
2001 568,508
2002 495,402
2003 437,848
2004 279,762
------------
$ 2,374,822
============
</TABLE>
b) Pending and Threatened Litigation
On July 23,1999 a case was filed in which the plaintiff alleges
the Company breached a Subscription Agreement to sell him
2,092,500 shares of Company stock. Plaintiff requested that the
case be dismissed without prejudice, but the Company demanded
that the case be dismissed with prejudice without any
compensation to Plaintiff. This case has been scheduled for trial
and the Company believes it will prevail.
F-19
<PAGE> 74
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES (Continued)
b) Pending and Threatened Litigation (Continued)
On December 11,1999 a case was filed against the Company and an
Officer by a Plaintiff who had been terminated for poor work
performance. In the original action the Plaintiff named eight
causes of action for unspecified amounts. The Plaintiff
subsequently filed an amended complaint reducing the causes of
action to five and naming the Company only. The Company has
denied all allegations.
The Company has received a claim from two individuals that allege
that the Company and a former Officer defrauded them when they
purchased Company stock. They have demanded $160,000 to resolve
all claims. Although a lawsuit has been threatened, one has not
been filed. The Company will deny all allegations.
c) Employment Agreements
The Company has entered into agreements with certain of its
officers. The agreements provide for a minimum annual salary and
options to purchase stock of the Company.
d) Purchase Obligations
In order to assure its supply of satellite transmission time when
needed, the Company has entered into Transponder Lease Agreements
with suppliers with available transponder capacity. The
agreements expire at various dates through November, 2002. The
Company may terminate the agreements only if there is a period of
interruption of service greater than 14 days or in the event the
satellite the agreement pertains to is taken out of service. The
Company is required to make minimum monthly payments as follows,
whether or not it makes use of the time under the agreements:
<TABLE>
<CAPTION>
Years ending December 31, 2000 $ 753,960
<S> <C> <C>
2001 753,960
2002 72,000
------------
$ 1,579,920
============
</TABLE>
In addition, at the Company's option, for additional monthly
fees, the Company may upgrade service if additional capacity is
needed. The Company is responsible for the payment of all taxes,
duties, user fees, and privilege or excise taxes pertaining to
the use of the suppliers' equipment. Fees paid under these
agreements totaled $601,960, $37,230, and $0 for the years ended
December 31, 1999, 1998, and 1997, respectively.
F-20
<PAGE> 75
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(6) NOTE PAYABLE - RELATED PARTY
<TABLE>
<CAPTION>
<S> <C>
Note payable - Vantage Capital, Inc., due
on demand, with interest at the Applicable
Federal Rates, unsecured. Michael Palmer,
CEO of eSat, Inc., is the 100% shareholder
of Vantage Capital, Inc. AFR at December 31,
1999 was 5.59%. $ 90,250
=============
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to U.S. Bank, secured by
accounts receivable, property and equipment,
monthly principal and interest payments of
$6,433, balloon payment of $229,186 due
April 17, 2000, interest at U.S. Bank
index rate plus 2%. $ 242,070 $ 291,950
Note payable to U.S. Bank, secured by
accounts receivable, property and equipment,
monthly principal payments of $4,201,
interest due monthly at the U.S. Bank
index rate plus 1%, due February 1, 2000. 8,276 54,110
-------------- -------------
250,346 346,060
Less current portion (250,346) (95,712)
-------------- -------------
$ -- $ 250,348
============== =============
</TABLE>
(8) STOCK PURCHASE AGREEMENT
During the one year period beginning December 29, 1999, the purchasers
of the outstanding Class C Preferred Stock committed to purchase up to
$20,000,000 of Common Stock at a price equal to 90% of the average of
the five lowest closing bid prices for the 10 days prior to each notice
of sale. The agreement requires sales in certain minimum amounts and
requires warrants of 15% with an exercise price of 125% of the purchase
price. The Company must register the shares delivered under this
agreement and the registration must be effective. As of the report date
the shares were not registered.
F-21
<PAGE> 76
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY
a) Common Stock and Warrants
At December 31, 1999, the Company has 50 million shares
authorized and 18,345,214 issued and outstanding. In addition,
the Company had outstanding at December 31, 1999, 5,039,163
warrants convertible into common shares at various prices ranging
from $0.72 to $14.70, with expiration dates through December,
2004.
A summary of the warrants outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
--------------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
$0.72 - $1.37 225,000 50 months $0.86
$2.40 - $3.14 3,009,286 49 months $2.94
$4.25 - $6.25 1,038,877 58 months $5.02
$8.50 400,000 58 months $8.50
$14.00 - $14.70 366,000 45 months $14.13
</TABLE>
b) Common Stock Reserved
At December 31, 1999, common stock was reserved for the following
reasons:
<TABLE>
<CAPTION>
<S> <C>
Exercise of common stock warrants 5,039,163
Conversion of preferred stock 847,037
Common stock dividends on preferred stock 5,129
Exercise of employee stock options 2,704,873
----------
8,596,202
==========
</TABLE>
F-22
<PAGE> 77
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (Continued)
c) Preferred Stock
Preferred stock consists of the following:
Series A - $.01 par value, 2 million shares authorized, 1 million
shares issued and outstanding, pays dividends quarterly in the
form of common stock at an annual rate of 12%, cumulative and
fully participating, convertible to common stock at a rate of one
share of preferred stock for $2 of common stock, rounded to the
nearest whole common share. The Company is required to maintain a
reserve of common stock sufficient to effect conversion. Holders
of Series A Preferred Stock are entitled to one vote per share.
In addition, the Company must obtain the consent of the holders
of not less than 50% of the shares of outstanding Series A
preferred stock on matters involving declaration and payment of
dividends on common stock, sale or issuance of capital stock of
the Company or options to acquire capital stock of the Company
other than Series A Preferred Stock, or changes in the general
character of the Company's business. All outstanding shares of
Series A preferred stock are held by Vantage Capital, Inc., a
related party.
Series C - $.001 par value, 50,000 shares authorized, issued and
outstanding, pays dividends quarterly in the form of cash or
common stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The
number of common shares to be issued upon conversion is
determined by multiplying the number of preferred shares to be
converted by a fraction. The numerator of the fraction is the
purchase price of the preferred shares. The denominator of the
fraction is the conversion price, calculated as the lesser of 125
percent of the closing bid price of the common stock on the
trading day immediately preceding the issue date, or 85 percent
of the five day average quoted price for the five trading days
immediately preceding the conversion notice date.
d) Stock Option Agreements
The Company has granted fixed employee stock-based compensation
options and variable employee stock-based compensation options.
The variable option agreements provide for exercise of options
into a number of shares of Common Stock, which is dependent on
the market value of the stock at the date of exercise. The fixed
and variable option agreements typically have a maximum term of 5
years and are typically fully vested at the date of grant.
F-23
<PAGE> 78
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
The fair value of each option granted is estimated on the grant
date using the Black-Scholes Model. The following assumptions
were made in estimating fair value:
<TABLE>
<CAPTION>
FIXED VARIABLE
OPTIONS OPTIONS
------------- ------------
<S> <C> <C>
Dividend yield 0.00% 0.00%
Risk-free interest rate 6.55% 6.55%
Expected life 2.50 years 2.50 years
Expected volatility 62.32% 62.32%
</TABLE>
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income and earnings per
share would have been reduced as follows:
<TABLE>
<CAPTION>
Net income:
<S> <C>
As reported $ 73,438,652
=============
Pro forma $(12,192,908)
=============
Basic earnings per share:
As reported $ 3.50
=============
Pro forma $ (0.58)
=============
Diluted earnings per share:
As reported $ 2.77
=============
Pro forma $ (0.46)
=============
</TABLE>
F-24
<PAGE> 79
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
The following is a schedule of the weighted average exercise
price and weighted average fair value in accordance with SFAS
123:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
--------------- ---------------
<S> <C> <C>
Exercise price:
Equals market price $10.25 $0.60
Exceeds market price $3.26 $1.25
Less than market price $6.23 $1.03
</TABLE>
The Company applies APB Opinion 25 in accounting for its fixed
and variable stock compensation plans. Compensation cost charged
to operations in 1999 was $2,522,340 and $(84,467,452) for the
fixed and variable plans, respectively. Compensation cost charged
to operations in 1998 was $0 and $90,754,014 for the fixed and
variable plans, respectively.
Following is a summary of the status of the variable plan during
1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
---------- ------------
<S> <C> <C>
Outstanding at January 1, 1999 6,752,236 $1.98
Granted -- --
Exercised (598,941) 0.95
Forfeited (4,564,422) 1.92
----------
Outstanding at December 31, 1999 1,588,873 2.56
==========
Options exercisable at December 31, 1999 1,588,873 2.56
==========
</TABLE>
F-25
<PAGE> 80
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Plan (Continued)
Following is a summary of the status of the variable plan during
1998:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
---------- ------------
<S> <C> <C>
Outstanding at January 1, 1998 -- $ --
Granted 6,752,236 1.98
Exercised -- --
Forfeited -- --
---------
Outstanding at December 31, 1998 6,752,236 1.98
=========
Options exercisable at December 31, 1998 6,752,236 1.98
=========
</TABLE>
Following is a summary of the status of the fixed plan during 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
---------- ------------
<S> <C> <C>
Outstanding at January 1, 1999 -- $--
Granted 1,366,000 7.32
Exercised -- --
Forfeited -- --
---------
Outstanding at December 31, 1999 1,366,000 7.32
=========
Options exercisable at December 31, 1999 1,116,000 8.15
=========
</TABLE>
F-26
<PAGE> 81
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Plan (Continued)
Following is a summary of the status of variable options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
$0.72 580,873 45 months $0.72
$3.00 908,000 45 months $3.00
$9.25 100,000 48 months $9.25
</TABLE>
Following is a summary of the status of fixed options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
$3.00 - $3.50 335,000 60 months $3.45
$4.00 460,000 55 months $4.00
$5.50 60,000 58 months $5.50
$10.25 11,000 54 months $10.25
$13.13 500,000 53 months $13.13
</TABLE>
e) Common Stock Issuance Settlement
During the years ended December 31, 1998 and 1999, Corporate
Financial Enterprises (CFE) was engaged to complete a private
placement of approximately 2 million shares. This private placement
was to yield proceeds of $1.5 million to the Company. A former
officer of the Company authorized the issuance of over 3.3 million
shares under this agreement. The Company received $1.5 million, but
received no consideration for the excess shares issued.
F-27
<PAGE> 82
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (Continued)
e) Common Stock Issuance Settlement (Continued)
In settlement of the discrepancy, the Company entered into a
Stock Reconciliation Settlement Agreement with CFE effective
December 31, 1999. Under the terms of the agreement the Company
received $558,310 in cash as settlement for the unpaid stock, net
of unpaid fees owed CFE. The CFE agreement for future fees will
be canceled. Also, the Company will keep a $1 million deposit
made by CFE in anticipation of purchasing certain preferred
shares. CFE waives all rights to receive any preferred shares.
Additionally, approximately 1.8 million shares owned by the
former officer were forfeited and canceled under a resignation
agreement.
(10) RETIREMENT PLAN
Effective January 31, 1998 the pooled subsidiary sponsored a 401(k)
profit sharing plan that covers all employees who have attained the age
of eighteen and have completed twelve months of service during the
eligibility period. The subsidiary elected not to make contributions to
the plan for the calendar years ended December 31, 1999 and 1998.
Company contributions are vested according to a schedule. Employee
contributions are fully vested.
(11) DISCONTINUED OPERATIONS
On June 30, 2000 the Company adopted a formal plan to dispose of its
majority owned subsidiary, iXposure, Inc., which is no longer part of
the Company's strategic long-term growth objectives. The subsidiary is
reported as a discontinued operation and its net assets and results of
operations are reported separately in the unaudited consolidated
financial statements. The disposal of the subsidiary is expected to be
completed prior to December 31, 2000. During the six months ended June
30, 2000 iXposure completed a private placement of its common stock and
is contemplating another private placement before December 31, 2000.
F-28
<PAGE> 83
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(11) DISCONTINUED OPERATIONS (CONTINUED)
Assets and liabilities of iXposure, Inc. to be disposed of consisted of
the following at June 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 89,722
Other current assets 6,800
Property and equipment 103,941
---------
Total assets 200,463
Accounts payable 207,382
Minority interest in equity 277,500
---------
Net assets to be disposed of $(284,419)
=========
</TABLE>
Assets are shown at their expected net realizable value and liabilities
are shown at their face amounts.
Operating results of iXposure, Inc. for the year ended December 31, 1999
are shown separately in the accompanying income statement. iXposure
commenced operations in 1999, and therefore had no operations in 1998 or
1997. Net sales of iXposure were $110,000 for the year ended December
31, 1999. This amount is not included in net sales in the accompanying
income statements.
(12) BUSINESS COMBINATION
In October, 1998, the Company completed a reverse acquisition with U.S.
Connect 1995, Inc. A total of 11,407,507 common shares were exchanged in
a 1:1 ratio. The transaction was a merger of a private operating company
into a non-operating public shell corporation with nominal assets.
F-29
<PAGE> 84
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(13) RELATED PARTY TRANSACTIONS
On September 17, 1999, the Company entered into a consulting agreement
(the "Agreement") with Vantage Capital, Inc., which is wholly owned by
Michael Palmer, Chief Executive Officer of eSat, Inc. The Agreement
states that the duties of the consultant include: (1) identifying,
analyzing, structuring, negotiating and financing business sales and/or
acquisitions, including without limitation, merger agreements, stock
purchase agreements, and any agreements relating to financing and/or the
placement of debt or equity securities of the Company; (2) assist the
Company in its corporate strategies; and (3) assist the Company in the
implementation of its business plan, in each case as requested by the
Company. The Agreement provides for compensation in the form of a
monthly retainer of $5,000 in cash or stock, the issuance of 1.2 million
in warrants exercisable at prices ranging from $4.25 to $8.50, a fee of
10% of the total aggregate consideration paid for any acquisition or
sale by the Company of any business, corporation, or division, a fee
equal to 10% of any private or public placement of debt or equity
securities of the Company, and a share in any fees or commissions
payable by third parties on any transaction contemplated by the
Agreement. In accordance with this agreement, a $160,000 liability was
accrued at December 31, 1999.
During the year ended December 31, 1999, the Company paid $575,526 to
Parks, Palmer, Turner and Yemenidjian, LLP, a public accounting firm in
which Michael Palmer, the Company's current CEO, was previously the
managing partner. The payments were compensation for the services of
Michael Palmer and associates of the firm.
F-30
<PAGE> 85
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(14) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
RESTATED
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
(Increase) Decrease:
Accounts receivable, net $(350,999) $ 201,101 $(260,589)
Inventory 154,071 (92,820) (139,651)
Other current assets (431,827) 3,539 (9,599)
Other assets (92,463) (39,746) 40,805
Increase (Decrease):
Accounts payable 136,292 8,726 151,489
Accrued expenses (14,371) 2,289 138,146
Unearned revenue 189,662 117,070 --
Other liabilities 587,665 (153,447) 266,277
Deferred revenue 23,967 19,537 20,068
--------- --------- ---------
$ 201,997 $ 66,249 $ 206,946
========= ========= =========
Operating activities reflect:
Interest paid $ 68,192 $ 27,009 $ 30,118
========= ========= =========
Income taxes paid $ 4,600 $ 4,600 $ 4,155
========= ========= =========
</TABLE>
Non-cash financing transactions consisted of subscription receivables
for stock issuance in the amount of $1,558,510, $0, and $0, and
financing of capitalized leases of $246,250, $71,768, and $0 at December
31, 1999, 1998, and 1997 respectively.
(15) SUBSEQUENT EVENTS
On January 1, 2000, iXposure, a subsidiary of eSat, Inc., acquired the
assets of Blackhawk Graphics in exchange for 200,000 iXposure shares.
The assets consisted primarily of intellectual property rights and will
be accounted for as a purchase by the subsidiary resulting in
approximately $400,000 of goodwill which will be amortized over seven
years. In addition, the owner of Blackhawk was hired under an employment
agreement that provides for the issuance of 350,000 iXposure stock
options after certain milestones are met.
F-31
<PAGE> 86
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(15) SUBSEQUENT EVENTS (CONTINUED)
On March 16, 2000, the Company entered into an agreement with a third
party investor to sell 6 million shares of common stock and 6 million
warrants convertible into common stock within 3 years at $3.3125 per
share for a total consideration of $12 million. The proceeds will be
used to retire preferred stock and for acquisitions and general
corporate purposes.
On March 29, 2000, the Company notified the holder of Preferred Stock
Series C of the intent to redeem all 50,000 outstanding shares for
$5,311,824 plus accrued dividends of $60,822.
The Company has signed a letter of intent to acquire InterWireless,
Inc., a wireless Internet service provider, and PacificNet Technologies,
Inc., an Internet service provider.
On April 12, 2000 the Company rescinded its letter of intent to redeem
all outstanding share of Series C Preferred Stock. The Company issued
Amended and Restated Certificate of Designations for the Series C
Preferred Stock.
On April 13, 2000 all of the outstanding shares of Series A 12%
convertible preferred stock were converted into 550,000 shares of common
stock. The conversion price was $2 per share.
In April 2000 the Company agreed to accept 34,988 shares of Company
stock held by a former employee in payment of his $250,000 employee note
receivable. The value of the stock was $142,139 at that date.
On April 13, 2000 the Company acquired InterWireless, Inc. in a business
combination accounted for as a purchase. The purchase price of
$4,045,662 exceeded the fair value of the net assets by $4,000,000,
which will be amortized as goodwill using the straight-line method over
7 years. The results of operations of InterWireless, Inc. will be
included with the results of the Company beginning April 13, 2000.
On April 13, 2000 the Company acquired all of the outstanding common
stock of PacificNet Technologies, Inc. in exchange for 2,750,000 share
of the Company's common stock, in a business combination accounted for
as a pooling of interests. Historical financial information presented in
future reports will be restated to include PacificNet Technologies, Inc.
Assuming these acquisitions had occurred on January 1, 1999 the
Company's net sales, net income, basic and diluted earnings per share
would have been $3,995,932, $73,869,364 $4.06 and $2.86 respectively for
the year ended December 31, 1999.
F-32
<PAGE> 87
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(15) SUBSEQUENT EVENTS (CONTINUED)
The note above regarding the acquisition of Blackhawk Graphics is
incorrect. There were 100,000 shares of eSat, Inc. common stock issued
as a signing bonus of an employment agreement. This was appropriately
accounted for as compensation expense in 1999, the period in which the
employment agreement was signed.
After March 31, 2000 the private placement agreement for the sale of
$12,000,000 of common stock was cancelled.
On April 13, 2000 the Company issued $75,000 shares of 6% Series D
preferred stock. This stock has a par value of $0.001,is fully
participating and convertible into shares of common stock. The proceeds
were partially used to finance the acquisition of InterWireless.
(16) PRIOR PERIOD ADJUSTMENT
The accompanying financial statements for 1998 have been restated to
correct an error in the application of APB 25, Accounting for Stock
Issued to Employees, made in 1998. The effect of the restatement was to
decrease net income for 1998 by $90,754,014 ($5.64 per share), net of
income tax.
(17) EXTRAORDINARY INCOME
During the year ended December 31, 1998, the Company was released from a
liability to a factoring company. In accordance with SFAS 4 the Company
recorded extraordinary income in the amount of $242,990.
The agreement with the factoring organization called for factor to
purchase receivables at a price equal to 80% of the face value of
acceptable accounts from the Company. The Company therefore would
appropriately record the transaction as a sale of receivables with
proceeds of the sale reduced by the fair value of the recourse
obligation. Under the terms of the Agreement, factor earned a fee equal
to 14% of the face amount of the accounts purchased and such fee shall
be taken at the time of collection of an invoice. Factor shall reserve
and hold 2.5% of the face value of purchased accounts for bad debts.
Factor shall be entitled to immediate and full recourse against the
Company to demand payment with respect to a purchase account in the
event that the purchase account is not paid in full within 75 days.
During the course of the relationship with the factor, the Company's
largest client filed a Chapter 7 bankruptcy liquidation resulting in
more than $100,000 in purchased accounts going unpaid. In accordance
with the terms of the Agreement factor made demand upon the Company for
immediate payment plus accrued unpaid fees and interest through the date
of Company's payment.
F-33
<PAGE> 88
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(17) EXTRAORDINARY INCOME (CONTINUED)
The Company was released from its liability to the factoring
organization because during the year 1998 it was unable to make payment
under the terms of the agreement, which had been entered into. Upon
breach of the agreement, the liability was transferred to the individual
who had provided a personal guarantee, Mr. David Coulter. This
individual subsequently settled all outstanding obligations with the
factoring organization through the transfer of 25,000 shares of
restricted Rule 144 stock from his name into the name of the factoring
organization and the payment of $89,000 out of his personal account.
F-34
<PAGE> 89
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of eSat, Inc. (the "Company") include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly its financial position as of June 30, 2000
and 1999, and the results of operations, stockholders' equity and cash
flows for the six months ended June 30, 2000 and 1999. The results of
operations for the six months ended June 30, 2000 and 1999, are not
necessarily indicative of the results to be expected for the full year
or for any future period.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation. The consolidated
financial statements and notes included herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25,
Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation cost is recognized on
fixed plans over the vesting period based on the difference, if
any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
For variable plans, APB 25 requires recognition of compensation
cost over the vesting period based on the difference, if any, on
the period-end date between the fair value of the Company's stock
and the amount an employee must pay to acquire the stock.
Forfeitures of variable plan options result in a reversal of
previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the
exercise price of those options and the fair value of the
Company's stock at December 31, 1998, the Company recognized a
substantial amount of non-cash compensation cost in 1998.
Subsequently, a large number of forfeitures and the re-pricing to
market of those options in 1999 and 2000 caused a considerable
reversal of the previously recognized non-cash compensation cost.
The resulting net income from operations for the periods ended
June 30, 2000 and 1999, should not be construed as profitable
operations during those periods (See Note 3 for Going Concern
disclosure).
F-35
<PAGE> 90
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b) Net Earnings or Loss Per Share
The following data show the amounts used in computing earnings
per share and the effect on income and the weighted average
number of shares of dilutive potential common stock:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Income available to common stockholders before
adjustments $ (1,714,097) $ 63,904,548
Preferred stock dividend (86,667) --
------------ ------------
Income available to common stockholders used in
basic EPS $ (1,800,764) $ 63,904,548
============ ============
Weighted average number of common
shares used in basic EPS 21,368,030 21,209,970
Effect of dilutive securities:
Stock options 334,628 4,308,795
Warrants 283,127 1,891,364
Convertible preferred stock Series A 287,347 --
</TABLE>
F-36
<PAGE> 91
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b) Net Earnings or Loss Per Share (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Convertible preferred stock Series C 2,000,000 --
Convertible preferred stock Series D 1,285,714 --
---------- ----------
Weighted average number of common shares and
dilutive potential common stock used in
dilutive EPS 25,558,846 27,410,129
========== ==========
</TABLE>
For the six months ended June 30, 2000 the calculation of certain
earnings per share amounts are the same because potential
dilutive securities would have had an antidilutive effect. The
securities that would have had an antidilutive effect are
presented above.
(3) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern; however, the
Company has sustained substantial operating losses in recent years. In
view of this matter, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent on the Company's ability to meet its
financing requirements, and the success of its future operations.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity
for the Company to continue as a going concern. The Company feels
certain financing arrangements coupled with product and services market
introductions will provide sufficient cash to meet its operating and
business expansion requirements in 2000.
(4) DISCONTINUED OPERATIONS
On June 30, 2000 the Company adopted a formal plan to dispose of its
majority owned subsidiary, iXposure, Inc., which is no longer part of
the Company's strategic long-term growth objectives. The subsidiary is
reported as a discontinued operation and its net assets and results of
operations are reported separately in the unaudited consolidated
financial statements. The disposal of the subsidiary is expected to be
completed prior to December 31, 2000. During the six months ended June
30, 2000 iXposure completed a private placement of its common stock and
is contemplating another private placement before December 31, 2000.
F-37
<PAGE> 92
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(4) DISCONTINUED OPERATIONS (CONTINUED)
The estimated loss on disposal of the discontinued operations of
$967,050 (net of income tax benefit of $-0-) represents the Company's
share of the provision of $1,050,000 for expected losses during the
phase out period from July 1, 2000 to December 31, 2000. The Company's
weighted average ownership percentage was 92.1 percent during the three
months and six months ended June 30, 2000.
Assets and liabilities of iXposure, Inc. to be disposed of consisted of
the following at June 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 82,191
Accounts Receivable 118,950
Other current assets 31,208
Property and equipment 218,646
-----------
Total assets 450,995
Accounts payable 189,926
Loans payable 250,000
Loan payable-related party 646,512
Losses and expenses accrued 1,050,000
Minority interest in equity 750,427
-----------
Net assets to be disposed of $(2,435,870)
===========
</TABLE>
Assets are shown at their expected net realizable value and liabilities
are shown at their face amounts.
Operating results of iXposure, Inc. for the six months ended June 30,
2000 are shown separately in the accompanying income statement. iXposure
had no operations during the first six months of 1999. Net sales of
iXposure were $529,571 for the six months ended June 30, 2000. These
amounts are not included in net sales in the accompanying income
statements.
(5) BUSINESS ACQUISITIONS
On April 13, 2000 the Company acquired InterWireless, Inc. in a business
combination accounted for as a purchase. InterWireless provides a
wireless Internet service enabling businesses to access the Internet at
speeds up to 155 Mbps. The purchase price of $4,197,881 exceeded the
fair value of the net assets by $4,152,219, which will be amortized as
goodwill using the straight-line method over 7 years. The results of
operations of InterWireless, Inc. have been included with the results of
the Company beginning April 13, 2000 through June 30, 2000. The results
of operations on a pro forma basis as though InterWireless had been
acquired on the first day of the current and prior periods would not be
materially different from the actual results of operations.
On April 13, 2000 the Company acquired all of the outstanding common
stock of PacificNet Technologies, Inc. in exchange for 2,750,000 shares
of the Company's common stock, in a business combination accounted for
as a pooling of interests.
F-38
<PAGE> 93
eSAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(5) BUSINESS ACQUISITIONS (CONTINUED)
Historical financial information presented has been restated to include
PacificNet Technologies, Inc.
(6) NOTE RECEIVABLE - EMPLOYEE
Note receivable - employee consists of a $250,000 note receivable from
an employee dated June 9, 2000, due in monthly payments of $1,580,
including interest at 6.5%, secured by personal property of the
employee, matures June 9, 2030. Subsequent to year-end the employee left
the Company. The former employee will forfeit to the Company 34,988
shares of the Company's stock, in exchange for the Company's forgiveness
of the debt. At June 30, 2000 a valuation allowance of $178,932 was
placed on the note receivable.
(7) PREFERRED STOCK
On April 13, 2000 all of the outstanding shares of Series A 12%
convertible preferred stock were converted into 550,000 shares of common
stock. The conversion price was $2 per share
On April 13, 2000 the Company issued 75,000 shares of 6% Series D
preferred stock. This stock has a par value of $0.001, is fully
participating and convertible into shares of common stock. The proceed
were partially used to finance the acquisition of Interwireless, Inc.
(8) RECLASSIFICATION
The loss on equity investment in discontinued operations was shown in
investing activities on the statement of cash flows as filed in the 10Q.
This amount has been reclassified as an operating activity in the
accompanying financial statements.
F-39
<PAGE> 94
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Universal City, State
of California, on September 28, 2000.
ESAT, INC.
By /s/ Mark S. Basile
--------------------------------------
Mark S. Basile,
Chief Financial Officer
Pursuant to the requirement of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Chester L. Noblett, Jr. Acting Chief Executive Officer, September 28, 2000
-------------------------------- Chairman of the Board and
Chester L. Noblett, Jr. Assistant Secretary
/s/ Mark S. Basile Chief Financial Officer, September 28, 2000
-------------------------------- Principal Accounting Officer
Mark S. Basile and Secretary
/s/ Salvator A. Piraino Director September 28, 2000
--------------------------------
Salvator A. Piraino
/s/ Edward Raymund* Director September 28, 2000
--------------------------------
Edward Raymund
/s/ Esther Rodriguez* Director September 28, 2000
--------------------------------
Esther Rodriguez
/s/ James E. Fuchs* Director September 28, 2000
--------------------------------
James E. Fuchs
</TABLE>
* By /s/ Mark S. Basile
--------------------------------
Mark S. Basile
Attorney-in-Fact
